WDIV ETF: The Portfolio Thoroughly Recalibrated, Issues Remain

The SPDR S&P Global Dividend ETF (NYSEARCA:WDIV) initially attracted my attention around a year ago, when I published a neutral note.

I concluded that the global dividend aristocrats ETF has appealing risk dispersion and an attractive standardized yield (around 4% back then), but the lowered bar for dividend growth (10 consecutive years, with caveats vs. 25 consecutive years in the case of the S&P 500 aristocrats) makes its portfolio less recession-resistant. I also highlighted its modest exposure to emerging markets as a benefit.

Today, I would like to provide a detailed update for two reasons. First, WDIV’s underlying index was reviewed in July 2021, then it has been rebalanced earlier this year, in January. Additionally, the constituents of its benchmark, the S&P Global Dividend Aristocrats Index, face a monthly dividend review according to page 9 of the methodology. Hence, more likely its equity basket should look different now, which deserves a deep discussion.

Second, with the interest rates question in the mix, the markets globally are being shaken by the bouts of bearishness, which once again highlights the importance of allocation to value plays that do not have excessive growth premia which are being pulverized now. With a focus on high yield and dividend growth, WDIV might be one of the value-oriented ETFs to consider. However, its strategy has downsides. More on that below in the article.

Portfolio changes and the likely reasons behind the moves

In short, WDIV is designed to track the cohort of relatively high-yield global dividend aristocrats (including the U.S.) or companies with at least ten years of DPS increases (there are caveats when the DPS is allowed to remain at least stable) from the S&P Global BMI. Small-caps with sub-$1 billion float-adjusted market values cannot join the index. Though developed and emerging markets equities are welcome, the index and the fund are heavy in North American stocks, with the U.S. and Canada together accounting for as of 41% of the net assets. This has almost not changed since my May 2021 note.

In sum, a seemingly solid strategy, though not without disadvantages. First, as I numerous times have already pointed out, international exposure amid the soaring U.S. dollar is precarious. This is certainly not completely true for the Canadian dollar which has been bolstered this year by the surging oil prices. However, for the yen and the euro, the other key currencies the fund has exposure to (e.g., the Japanese stocks have ~11.6% weight), 2022 has been completely lackluster. I have warned that a rough ride is ahead for the yen given Tokyo’s commitment to ultra-loose monetary policy in my article on the iShares Robotics and Artificial Intelligence Multisector ETF (IRBO) earlier this year. It is not clear if the currency has found the bottom already.

As of May 4, 2022, WDIV was long 97 stocks, while only 64 of them could be found in the equity basket from May 2021.

Another way of saying, 32 stocks were removed due to different reasons, including a dividend cut or a failed high yield test.

Below, I will briefly assess a few key positions that were eliminated.

• Exxon Mobil (XOM) is amongst the key stocks that are missing. Back in May 2021, it was the largest holding of the fund with a close to 2% weight. XOM is a flawless dividend payer as its S&P 500 dividend aristocrat status was confirmed with another DPS hike last year. So it remains amongst the holdings of the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). The likely culprit of its removal is the capital appreciation which resulted in the compression of the dividend yield. I should also note that there is no doubt that the absence of this heavyweight likely cost the fund a few basis points of returns or more, as the stock has been on a tear this year, gaining ~44%, amid the soaring Brent prices, with the rally reignited by the energy market supply/demand imbalances.
• AT&T (T) has lost its S&P 500 dividend aristocrat status and was subsequently removed from NOBL and WDIV. I would say that disposal of the T shares was more of a tailwind for the fund’s return since T has been sliding dramatically this year, with a YTD price return of ~(21.2)%
• People’s United Financial Inc. (traded with a ticker PBCT) is also no longer a WDIV holding since it has been acquired by M&T Bank (MTB) earlier this year. PBCT was also removed from the NOBL portfolio.
• National Health Investors (NHI) lost its place in the basket likely because of the sizeable dividend cut announced in June 2021. This healthcare REIT had an ~1.2% weight.
• Toronto-quoted midstream player Pembina Pipeline (PBA) was the fund’s 6th largest position a year ago, with a weight of ~1.8%.
• Eight Tokyo-quoted companies were ousted, including Japan Tobacco (OTCPK:JAPAF), Hengan International Group (OTCPK:HEGIF), Sekisui House (OTCPK:SKHSY), and Yokohama Rubber (OTCPK:YORUF), etc. Anyway, it should again be noted that Japan still remains in the top trio of the countries the fund is most exposed to, with a weight close to the last year’s level, ~11.6%.

At the same time, 33 stocks were added; at the moment, they account for ~31% of the portfolio. Below are the most notable additions,

• LyondellBasell Industries (LYB), a large-cap chemical player, with an ~4.1% forward yield.
• Rubis (OTCPK:RBSFY), a French gas utility, with a forward yield of ~7.6%.
• Tokyo-quoted Takeda Pharmaceutical (TAK), yielding ~4.7%.
• Telenor (OTCPK:TELNF), a Fornebu, Norway-based telecommunication company; its dividend yield is slightly north of 7%.
• ~5.3% yielding Verizon (VZ), a U.S. telecom juggernaut, has also managed to qualify for inclusion.

Returns it has delivered this year

During the May 2021 – April 2022 period, WDIV delivered a total return of around (0.8)%, significantly lagging the iShares Core S&P 500 ETF (IVV), as well as NOBL and its FCF-focused peer Pacer Global Cash Cows Dividend ETF (GCOW); I wrote a bullish note on GCOW in February.

I believe the FX factor was one of the culprits.

Since the beginning of the year, its performance has been rather lackluster, though it certainly has been doing better than the growth-heavy IVV, and, surprisingly, even better than NOBL, but GCOW is a clear winner.

Final thoughts

WDIV is an ~$286 million fund with an expense ratio of 40 bps, which looks seemingly adequate for the international equity basket. Though it has been deeply recalibrated since May 2021, it is still heavy in U.S., Canadian, and Japanese equities, and financials is still its top sector with ~23.7% weight.

There are a few reasons why I believe WDIV is not a Buy.

• First, its NAV is vulnerable to further appreciation of the U.S. dollar amid long overdue interest rate increases designed to tame inflation and (hopefully) not suppress economic growth. Its FX exposure has already resulted in subpar one-year returns and might continue weighing on its performance going forward. Certainly, that is less of an issue over longer periods, e.g., ten years, when the current hawkish period will be over, but that is impossible to predict how developed world currencies will perform against the generously valued USD in the relatively distant future. For now, the short-term picture for the dollar is bright. Of course, I would welcome any contrarian points in the comments section.
• Second, the major red flag is the dividend profile overall as the fund has a D+ grade, with lackluster growth (or outright contraction) being among the contributors to the poor rating.

All in all, WDIV is only a Hold.