Another Huge Fund You've Probably Never Heard Of

A few days ago we looked at the Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF (QDPL) as being a very big fund that most people probably haven't heard of. The iShares Core Dividend ETF (DIVB) is another $500 million fund that I doubt too many people have heard of. It was mentioned in Barron's. 

Despite the name it is more than just dividends, it is share buybacks combined with dividends. The Cambria Shareholder Yield ETF (SYLD) also combines dividends and buybacks and they use the term shareholder yield to describe that combo. Meb Faber regularly makes the argument that buybacks and dividends are two different versions of the same thing (I am simplifying) except that buybacks are more tax efficient which they are. 

The very basic argument for buybacks, beyond signaling that the company is in a strong financial position is that everything else being equal, fewer shares means less supply which should push the price up. Remember, I said everything else being equal so that assumes constant demand. It gets a little tricky because some companies buyback shares only to then turn around and reissue them via stock option awards to employees. 

In Part 1 of 20 Years Of Blogging, I mentioned that when I was in the CNBC rotation they started asking me to come on for topics I didn't really know too much about. Kind of related, they wanted me to come on one time as the bull on stock buybacks. I know a little but I was not and am not an expert. Yes there is a the potential supply and demand inertia but more than not being an expert, I don't actually believe in it as a factor, I don't think there is any real edge there. Yes, there is research that supports it and if you find it compelling then go for it. 

Looking at SYLD, DIVB which as been around for a while and the Invesco Buyback Achievers ETF (PKW), I don't know how you can push back on the idea that shareholder yield and buybacks are just factors, like any other factor that will at times lead, at times lag and of course cannot always be best.

The Sharpe Ratios of all three are quite a bit less than VOO too.

Year by year, SYLD was the best perform three times including a monster year in 2020, and it was the worst performer twice. DIVB was never the worst or the best but has always been right there with the others. PKW was the best once and the worst once. VOO was the best four times and the worst twice. 

The overall CAGR of all three is lower than VOO but the performance is reasonably in line. The volatility that all three take on is noteworthy. SYLD's is much higher than VOO, that really is a big difference. DIVB's volatility is sort of a push and PKW's is higher but the SYLD number is eyepopping. And all three did go down significantly less than VOO in 2022.

I plugged in the Invesco S&P 500 Momentum ETF (SPMO) to see how it compares. For the same dates, SPMO compounded at 16.85% with a standard deviation of 17.81. So better growth with similar volatility. It was the best performer four times and was never the worst performer. 

The 290 basis points of outperformance over VOO obviously cannot be assured going forward and there will be periods where momentum is the worst factor but for some reasonable chance of outperformance over an intermediate timeframe, how much more volatility would you be willing to take on? Where SPMO offers a reasonable chance of outperformance, there doesn't seem to be the same opportunity with SYLD. I'd expect it to be close more often than not and maybe have another monster year like 2020 but would you be willing to take on that much more volatility without a reasonable chance to outperform? 

I would also consider the correlation matrix. They are all high. SYLD is the lowest but the lack differentiation speaks to the idea that these will mostly tradeoff performance wise over the long term. I've been pointing toward momentum maybe adding some value as part of a blend of factors but going forward but there is no assurance that it can continue to do so. I think it can be close even if it stops outperforming. 

Neither SYLD nor DIVB are big yielders which makes sense. They're higher than VOO at 1.81% and 2.55% respectively. The argument for buybacks, and by extension shareholder yield, as a factor seems overly academic to me. It should work but I think the reality is it is no better than any other factor. If it resonates then go for it. If you can figure out some sort of blend that includes buybacks or shareholder yield with other factors then again, go for it.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.