Product road test – a UBS dividend ETF

Co-founder of the Switzer Report
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If you are looking for a portfolio of shares biased to a higher franked dividend yield, then the ‘UBS IQ Research Preferred Australian Dividend Fund’ may be an option worth considering. Unlike most ETFs (exchange traded funds) that track passive market capitalisation indices, this ETF tracks an index that comprises UBS’s top research picks.

Launched earlier this year, the UBS IQ Preferred Australian Dividend Fund (ASX Code: DIV) provides exposure to a diversified portfolio of approximately 40 securities, selected by UBS, designed to provide sustainable income via the distribution of dividends and franking credits. It follows the success of another exchange traded fund from UBS, the ‘UBS’s IQ Research Preferred Australian Share Fund’ (ASX Code ETF), which was launched in 2012.

The research process

UBS creates the index (the ‘UBS Research Preferred Dividend Index’), which comprises approximately 40 securities. The process is:

  • Eligible securities are those rated “buy” or “neutral” by UBS (a “buy” rating corresponds to predicted market outperformance, “neutral” to predicted market performance);
  • Consensus forecasts are used to eliminate securities that are predicted to not pay a dividend in the next 12 months;
  • Quantitative filters, with a focus on financial statement quality and forecast dividend yield, are applied, the latter grossed up for franking credits, and each security is ranked;
  • The highest-ranking securities are selected, provided that at least one of the major banks is represented.

The 40 or so securities are then weighted, using a modified free float market capitalisation model calculated with reference to both size and liquidity. According to UBS, this results in a portfolio where weightings are more evenly allocated between larger market cap and smaller market cap securities.

The index is rebalanced and reweighted on a quarterly basis. A turnover cap of 15% is applied to limit changes. Should UBS downgrade the rating of a stock to a “sell” between quarterly rebalances, the stock may be removed from the index.

The ETF

The ETF is designed to passively track the UBS Preferred Dividend Index. It is listed on the ASX and trades under the code DIV. The underlying stock portfolio and sector weightings as at 31 March are shown below. These highlight strong sector biases in financials, consumer discretionary, industrials and utilities – with underweight positions in telecommunications, health care and materials.

The pluses

UBS is one of Australia’s top rated equity research houses – if not currently number one, it is certainly in the top two or three. So, being able to access this expertise in the construction of the portfolio should be a big bonus. Further, the fund’s objective (‘sustainable income’) is going to suit many SMSF trustees.

Management fees of 0.70% per annum are high compared to most ETFs, however low compared to most managed funds that embrace an active management style or aim to outperform through stock selection. Buy/sell liquidity is good, with UBS quoting an active market on the ASX and the spread at only 0.1%. Because it is an ETF, investors can potentially invest from as little as $500.

Distributions are paid quarterly, and can be automatically re-invested through a distribution reinvestment plan.

And the minuses

While it is not a minus and may never be, there is no (published) data yet to say whether UBS’s research process is shooting the lights out or not. The ETF is designed to passively follow the UBS Preferred Dividend Index, and we can very confidently assume that it will track this index to a tee.

The question is not about how closely the ETF tracks the index – it is whether this is a well-constructed index – or not. Is the index meeting its objective, and delivering higher sustainable income, with perhaps less market volatility?

This is the hard question to answer, because the data on the index/fund is only available since 14 January, and there is no ready comparator to determine its performance.

So investors are going to need to be mindful of this when evaluating the performance of their investment. Hopefully, they should enjoy a higher sustainable income (more likely at the moment to be 5 to 6% per annum rather than the market average of 4%), near market performance with perhaps a little less volatility.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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