Dragon Claws
The Pacer Metaurus US Giant Cap Dividend Multiplier 400 ETF (NYSEARCA:QDPL) represents a extremely progressive product because it is likely one of the solely autos permitting buyers to realize publicity to dividend futures through an ETF.
Dividend futures symbolize an fascinating funding alternative and thus, at first look, an ETF that gives publicity to this market section is intriguing.
Nonetheless, QDPL suffers from a deadly flaw which is its very excessive expense ratio coupled with a portfolio which is primarily passive. For that reason, I imagine buyers ought to keep away from this ETF.
ETF Overview
QDPL seeks to trace the efficiency of the Metaurus US Giant Cap Divided Multiplier Index – Sequence 400. The fund goals to supply money distributions that are 400% of the S&P 500 extraordinary yield with modestly decrease publicity to the S&P 500 itself.
QDPL launched in August 2021 and presently has ~$200 million in property. The fund fees a complete expense ratio of 0.79% and has a distribution yield of 6.66%.
Revolutionary Funding Technique
QDPL will be damaged down into two separate methods. The primary technique accounts for ~88% of the fund and is solely publicity to the S&P 500. Clearly, this a part of the technique just isn’t progressive.
The place the QDPL story will get extra fascinating is concerning the opposite ~12% of the fund. QDPL makes use of the remaining ~12% of property as collateral to get publicity to dividend futures. QDPL just isn’t levered because the futures are absolutely collateralized.
QDPL typically invests within the three most present annual S&P Dividend Futures contracts. In complete, QDPL targets dividend publicity that’s 4x the extent of the S&P 500.
![QDPL Overview](https://static.seekingalpha.com/uploads/2023/12/9/1067633-17021649700403829.png)
Pacer ETFs
Dividend Futures Current An Engaging Funding Alternative
Dividend futures are inclined to current a sexy structural funding alternative. The explanation for that is that funding banks typically supply equity-linked structured merchandise to shoppers with payouts linked to cost modifications quite than complete returns. Thus, if the funding financial institution decides to hedge publicity with futures or a basket of equities they’re left with publicity to actions in dividends.
The dividend futures market permits banks to hedge out any undesirable dividend publicity. Banks are typically sellers of dividend futures whereas different gamers akin to asset administration companies or hedge funds are patrons of dividend futures.
A protracted place in dividend futures tends to generate optimistic returns on condition that it’s a dangerous place with a excessive correlation to equities. S&P 500 near-term dividend futures are inclined to have a correlation of ~0.6 with the S&P 500 whereas longer dated divided futures have a correlation of ~0.7 with the S&P 500.
Whereas dividends are inclined to rise by ~6% per 12 months, each every now and then there’s a main drop as a consequence of a pointy recession. For instance, the S&P 500 dividend dropped by ~23% in 2009 as a result of sharp recession and monetary disaster. In 2020, the S&P 500 dividend dropped by ~4% as a result of covid-19 recession.
Analysis performed by S&P suggests {that a} purchase and maintain dividend futures technique has potential to ship an annual return of 4%-5%. It ought to be famous that this degree of return is simply ~50% of the historic annual S&P 500 return. Thus, dividend futures have a tendency to supply decrease threat and decrease return profile in comparison with the S&P 500 itself.
S&P 500 Dividend Futures Time period Construction
At the moment, the S&P 500 dividend futures time period construction is pretty flat which suggests a protracted place in close to dated dividend futures contracts is properly positioned to earn a 4%-5% return. For instance, the 2024 contract presently is priced at 71.15 which is simply 1.3% above the 2023 contract. Thus, if S&P 500 dividends rise by 6% in 2024 the 2024 contract will value will rise by ~4.7%. Additional out futures supply even higher return potential as additional out futures are priced under 2024.
I don’t discover the return potential very enticing vs short-term treasuries. Buyers can presently purchase 1 12 months Treasury bonds yielding ~5.1%. Nonetheless, I do imagine that long term dividend futures such because the 2029 contract are extra interesting. That mentioned, these long-term contracts usually are not what QDPL holds.
![S&P Dividend Futures Term Structure](https://static.seekingalpha.com/uploads/2023/12/9/1067633-17021693922645118.png)
CME Group
QDPL Holds Quick-Dated S&P 500 Dividend Futures Contracts
At the moment, QDPL has publicity to short-term S&P 500 Dividend Futures contracts. QDPL has 5.06% notional publicity to the Dec 2023 contract, 5.05% notional publicity to the Dec 2024 contract, and 4.5% notional publicity to the Dec 2025 contract.
The fund will rebalance later this month and the Dec 2023 contract will probably be rolled right into a Dec 2026 contract, which I imagine provides higher upside in comparison with the Dec 2024 and Dec 2025 contracts.
Excessive Expense Ratio Is A Sturdy Detractor
QDPL fees an expense ratio of 0.79%. That is very excessive and compares to a mean fairness ETF expense ratio of ~0.16%. The fund’s charge strikes me as notably excessive on condition that it’s following a guidelines primarily based index and isn’t actively managed.
The excessive charge is particularly problematic on condition that ~85% of the fund is invested in passive S&P 500 publicity. Buyers can get entry to that publicity through funds such because the Vanguard S&P 500 ETF (VOO) which has an expense ratio of simply 0.03%. Thus, buyers are actually paying an expense ratio of ~5.3% on the 15% of the fund which is invested in dividend futures. This degree of charge is particularly problematic given the comparatively low return potential of near-term dividend futures contracts that QDPL invests in.
That is the deadly stream of the product. Although dividend futures are fairly enticing on a standalone foundation, they aren’t enticing within the context of a 5.3% annual charge required to acquire the publicity.
Historic Efficiency
Since its inception in August 2021, QDPL has delivered a complete return which is 0.48% lower than the entire return delivered by S&P 500. This consequence doesn’t shock me on condition that the administration charge will function a small headwind annually.
Whereas QDPL has not trailed the S&P 500 by a lot so far, I imagine the hole will widen time beyond regulation because the S&P 500 rises. QDPL’s allocation of 15% to entrance finish dividend futures is a decrease threat / decrease anticipated return in comparison with a 15% allocation to the S&P 500. Thus, over time I count on QDPL to expertise some efficiency drag annually.
![Chart](https://static.seekingalpha.com/uploads/2023/12/9/saupload_13beb80efb55c7e29908af383450f84f.png)
Various Technique To Take into account
Skilled and complex buyers who’re enthusiastic about making an attempt to benefit from the structural alternative associated to dividend futures ought to take into account getting direct publicity to longer-dated dividend futures versus acquiring publicity by QDPL which carries a excessive administration charge.
Much less refined buyers who wish to mimic the return profile of QDPL with out touching dividend futures ought to take into account investing ~85% in a low charge S&P 500 index product akin to VOO and the remaining 15% in a low threat prime quality floating price bond autos such the Janus Henderson AAA CLO ETF (JAAA) which I just lately featured in my piece JAAA: A Nice ETF Serving to To Degree The Enjoying Subject.
Conclusion
QDPL represents an progressive ETF which permits buyers to entry the dividend futures market in an ETF automobile.
Dividend futures symbolize a sexy structural funding alternative. Close to-term dividend futures are typically decrease threat/ decrease reward relative to longer dated dividend futures.
QDPL fees a really excessive administration charge for a product that’s 85% invested within the S&P 500. Because of this, the excessive administration charge is de facto being paid to handle simply 15% of the property within the dividend futures technique.
Along with the administration charge headwind, QDPL can also be poised to underperform the S&P 500 going ahead as near-term dividend futures have much less upside potential in comparison with the S&P 500.
For these causes, I count on QDPL to underperform the S&P 500 going ahead and I’m initiating protection with a promote ranking. I might take into account upgrading the ETF is the administration charge had been considerably decreased and technique was altered to focus extra on longer-dated dividend futures which are inclined to have extra upside potential.