KBWD: High-Risk, High-Return, High-Yield Financial ETF – 7.3% Dividend Yield

Summary

KBWD is a high-yield financial index ETF.

The fund offers investors a strong 7.3% dividend yield and potential capital gains.

Risk, volatility, and losses during downturns are quite high too.

This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »

cemagraphics/iStock via Getty Images The Invesco KBW High Dividend Yield Financial ETF ( KBWD ) is an index ETF investing in the highest yielding financials, including BDCs, mREITs, banks, and the like. KBWD’s holdings have very strong yields, the fund itself has a 7.3% dividend yield, but are riskier than average too. KBWD is a classic high-risk high-return investment opportunity, but one that will, I believe, perform quite well in the future. It is a buy, but only appropriate for more aggressive income investors and retirees. KBWD Basics

Dividend Yield: 7.30%

Management Fee: 0.35%

Total Returns CAGR (Inception): 7.65%

KBWD Overview

KBWD is an index ETF, tracking the KBW Nasdaq Financial Sector Dividend Yield Index , an index of high yield U.S. financials. It is a reasonably simple index, including the highest yielding U.S. financials, subject to a basic set of trading, liquidity, float, and dividend sustainability criteria. It is a dividend-weighted index: the higher the yield, the greater the weight. There are security and industry caps to ensure a modicum of diversification. Besides this, nothing much else stands out about the fund’s index.

KBWD itself invests in 40 securities, a reasonable number for a niche industry equity fund. Concentration is a bit higher than average, with the fund’s top ten holdings accounting for 36% of its value. These are as follows. From what I’ve seen, KBWD’s holdings are roughly evenly divided between: BDCs, which focus on loans to small and medium-sized private equity companies

mREITs, which focus on leveraged mortgage investments

Community banks and other small-cap financials, which focus on more traditional financial services

As the fund overweights securities with particularly strong dividend yields, its largest holdings are generally mREITs, which have the highest yields. mREITs are also riskier than average, as excessive use of leverage is common in the sector. In general terms, the fund’s holdings are riskier and smaller than average, as a consequence of focusing so strongly on dividend yields.

KBWD’s strategy and holdings provide investors with several strong benefits and drawbacks. Let’s have a look at these, starting with the benefits. KBWD – Benefits and Investment Thesis

Strong 7.3% Dividend Yield

KBWD focuses on the highest yielding financials in the market, which results in a comparatively high yield fund. KBWD sports a strong 7.3% trailing twelve months yield, and an even stronger 7.9% forward dividend yield. Forward dividends are higher, and more informative, as the fund has been hiking its dividend all year. The fund’s 7.3% dividend yield is quite high on an absolute basis, and much higher than that of all relevant broad-based equity and financial industry indexes. Data by YCharts KBWD’s dividends, as those of the vast majority of ETFs, are fully covered by underlying generation of income. There are no destructive return of capital distributions or similar, it is pure income. (Source: KBWD Corporate Website)

KBWD’s dividends have also seen consistent hikes throughout the year, growing 11.5% during 2021. Growth is due to underlying holding dividend growth which is, in turn, due to improved economic fundamentals and underlying holding financial performance. Future dividend growth is dependent on continued economic strength, both of which seem likelier than not. (Source: Seeking Alpha) KBWD’s strong, fully-covered, growing 7.3% dividend yield is a significant benefit for the fund and its shareholders, and KBWD’s core investment thesis. This is an income vehicle, and is meant for income investors.KBWD’s share price has come down by a bit these past six months, unlike that of most equity indexes, which presents something of a buying opportunity for investors. Data by YCharts As can be seen above, KBWD is down 2%, while the S&P 500 is up by 10%. Cheaper prices are almost wholly due to investor sentiment: fundamentals remain strong, as evidenced by the fund’s growing dividend.KBWD’s valuation itself is also quite cheap. The fund sports a 13.0x PE ratio and a 1.7x PB ratio, both significantly lower than those of most broad-based equity indexes. For reference, the S&P 500 sports a PE ratio of 24.4x, PB ratio of 4.5x.KBWD’s valuation is also cheaper than that of most other equity sub-segments. As per the fund’s management, KBWD focuses on small-cap value securities, which makes sense considering the fund’s BDC […]

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