April 25, 2023

How an Active, ETF-Based High-Dividend Approach May Help Long-Term Returns

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After decades of navigating a low-interest-rate environment, many investors became accustomed to the difficulty of sourcing income-focused investments. It’s a challenge that led many investors to look for ways to bolster income from their equity allocations—often through high-dividend stocks.

 

High-dividend exchange-traded funds (ETFs) have been a particularly popular path. According to Broadridge Financial Solutions, US Equity Income ETFs experienced record-breaking inflows of $57 billion in 2022, bringing the category’s total AUM to an impressive $338 billion as of January 2023. These flow numbers demonstrate just how strong investor appetite is for income-generating ETFs as interest-rate and equity volatility continue to rock financial markets.

 

High-Dividend Strategies: Income Potential, but Design Matters

Historically, US high-dividend stocks have not only helped increase income potential but have outperformed the equity market over multiple cycles. However, these stocks—and strategies investing in them—don’t always come out on top. Many high-dividend stocks feature value traits, which can be a headwind in growth-driven markets. For example, from 2017 through September 2020, the top 10% of dividend payers in the Russell 1000 Index trailed the broader equity market* by nearly 6.4% annualized. 

In our view, focusing on strategy design choices can help mitigate the challenges of lackluster performance when value stocks are out of favor. High-dividend strategies traditionally reside in value-leaning sectors such as energy, utilities and healthcare. Including these sectors can bolster portfolio yield, but it may also result in a strategy that underweights the growth style. We believe this may lead to missed market opportunities in certain segments of the market cycle.

In addition, we believe it can also reduce long-term market participation. Given the value orientation of a healthy slice of typical high-dividend strategies, the beta of the overall strategies may be substantially less than is typical for the S&P 500 (Display, left). It’s true that a lower beta may help cushion against market sell-offs, but heavy exposure to certain under-pressure sectors may still leave investors with substantial downside participation (Display, right). Many passive high-dividend ETFs track high-dividend indices, which can sometimes fall victim to these unintended biases (Display, middle), given their income emphasis.

 

Income-Focused Strategies Vary—and May Have Unintended Exposures

 
 

Past performance does not guarantee future results. 
*MSCI USA High Dividend Yield Gross Return USD Index. †S&P 500 High Dividend Total Return USD Index. ‡Morningstar US High Dividend Yield Total Return USD Index. §Morningstar Dividend Leaders Total Return USD Index. ||FTSE High Dividend Yield Total Return USD Index. #S&P 500 Total Return.
Beta is calculated versus the S&P 500 Total Return Index from January 2013 through December 2022. Maximum drawdown is calculated from January 2013 through December 2022.
As of December 2022
Source: FTSE Russell, Morningstar, MSCI and AB

 

Take an Active Approach to High-Dividend ETFs

One possible avenue for avoiding potential biases in high-dividend strategies is to broaden the net for opportunities beyond traditional high-dividend payers, seeking to boost market participation and reduce other common high-dividend biases. 

Actively managed high-dividend ETFs may be an appealing vehicle choice. As market volatility increased in 2022, more investors turned to actively managed ETFs, seeking the dynamic nature of active management combined with the liquidity, transparency and tax efficiency of the ETF wrapper. Equity market volatility also produced tax-loss harvesting opportunities in US stocks, enabling investors to realize losses and reinvest the proceeds into actively managed ETFs.

In March 2023, AllianceBernstein launched its first actively managed AB US High Dividend ETF (Ticker: HIDV). This ETF seeks to provide a yield profile of at least 2% above the S&P 500, with the potential for capital growth and a target beta of 1.0 to the S&P 500. The active-selection process the strategy employs emphasizes a beta-neutral and balanced sector approach, which may help investors to avoid some of the common drawbacks of index-tracking dividend ETFs. 

You can learn more about AB’s actively managed ETF solutions here. 

 
 

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Beta measures volatility relative to a benchmark. A drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund.

Investing in securities involves risk, and there is no guarantee of principal.

Investors should consider the investment objectives, risks, charges and expenses of the Fund/Portfolio carefully before investing. For copies of our prospectus or summary prospectus, which contain this and other information, visit us online at www.alliancebernstein.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.

Shares of the ETF may be bought or sold throughout the day at their market price on the exchange on which they are listed. The market price of an ETF's shares may be at, above or below the ETF’s net asset value ("NAV") and will fluctuate with changes in the NAV as well as supply and demand in the market for the shares. Shares of the ETF may only be redeemed directly with the ETF at NAV by Authorized Participants, in very large creation units. There can be no guarantee that an active trading market for the Fund’s shares will develop or be maintained, or that their listing will continue or remain unchanged. Buying or selling the Fund’s shares on an exchange may require the payment of brokerage commissions, and frequent trading may incur brokerage costs that detract significantly from investment returns. 
Dividend-Paying Securities Risk: The Fund invests in securities that pay dividends. There can be no assurance that dividends will be declared or paid on securities held by the Fund in the future, or that dividends will remain at current levels or increase. Active Trading Risk: The Fund expects to engage in active and frequent trading, which will increase the portfolio turnover rate. A higher portfolio turnover increases transaction costs and may negatively affect the Fund’s return. Quantitative Model Risk: AB uses a quantitative model to identify investment opportunities for the Fund. There is a risk that market behavior will change and the patterns upon which the models are based will weaken or disappear, which would reduce the ability of the models to generate an excess return. Equity Securities Risk: The Fund invests in publicly traded equity securities, and their value may fluctuate, sometimes rapidly and unpredictably, which means a security may be worth more or less than when it was purchased. Market Capitalization Risk: Investments in mid-capitalization companies may be more volatile than investments in large-capitalization companies. Foreign (Non-US) Investment Risk: Investments in securities of non-US issuers may involve more risk than those of US issuers. These securities may fluctuate more widely in price and may be more difficult to trade than domestic securities due to adverse market, economic, political, regulatory or other factors. Non-Diversification Risk: The Fund may have more risk because it is “non-diversified,” meaning that it can invest more of its assets in a smaller number of issuers. Accordingly, changes in the value of a single security may have a more significant effect, either negative or positive, on the Fund’s net asset value. New Fund Risk: The Fund is recently organized, giving prospective investors a limited track record on which to base their investment decision.

AllianceBernstein L.P. (AB) is the investment adviser for the Fund.

Distributed by Foreside Fund Services, LLC. Foreside is not related to AB.