Under the Hood: Claymore Global Monthly Advantaged Dividend ETF

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The fund: Claymore Global Monthly Advantaged Dividend ETF (CYH)

The index: Zacks Global Multi-Asset Income Index, which was created specifically for Claymore. It combines the Zacks Multi-Asset Income Index (made up of U.S. securities) and the Zacks International Multi-Asset Income Index, which includes developed and emerging countries outside the U.S.

This is a “strategy index,” which means it is not designed to passively track the whole universe of dividend-paying stocks. Rather, the securities are hand-picked “using a proprietary model based on dividend growth, the capacity to increase the current dividend, liquidity, and dividend yield.” The methodology is not made public.

The most important thing to understand about the Zacks index is that it is not limited to common shares of dividend-paying companies. Almost half the index is made up of preferred stocks, American depositary receipts (ADRs), real estate investment trusts (REITs), master limited partnerships, and closed-end funds.

The cost: The fund’s MER is 0.67%, but the prospectus says that the forward agreement (explained below) will add about 0.50% more to the cost.

The details: This is no plain-vanilla dividend ETF. It’s a complicated product, and if you’re considering investing in it, take the time to understand how it works.

CYH is based on two US-listed ETFs from Guggenheim, Claymore’s parent company: 40% is allocated to the Guggenheim Multi-Asset Income ETF (CVY), which covers the US, and 60% to the Guggenheim International Multi-Asset Income ETF (HGI), whose largest allocations are to the UK, Canada and France. In all, CYH holds a widely diversified portfolio of 283 companies with no stock comprising more than 2% of the fund.

The holdings include blue-chip names in many sectors — Nokia, Allianz, Novartis — but the fund is highly skewed to the energy sector. This isn’t obvious if you look at the fund’s fact card, which shows a 20% weighting to financials. In fact, most of the companies classified as financials are income trusts in the oil and gas sectors, not banks or insurance companies.

Now for the complicated part. CYH doesn’t actually hold the two US-listed ETFs upon which it’s based. Instead, it has teamed up with National Bank of Canada to create a type of derivative called a forward agreement. It works like this: Claymore invests CYH’s assets in a portfolio of Canadian non-dividend-paying stocks. Then they periodically swap the returns from these Canadian stocks with National Bank at prices determined by the performance of the Zacks index.

Why such a convoluted structure? Because foreign dividends would be subject to a 15% withholding tax and are fully taxed as income. Thanks to the forward agreement, CYH’s distributions can be characterized as return of capital, which is non-taxable, or as capital gains, which are taxed at half the rate of regular income. (While this sounds like financial sleight of hand, forward agreements are common in the industry and not a cause for concern.)

When CYH was launched in January 2008 it had a yield of almost 9%, but that year it lost about 41% — of course, so did a lot of other equity funds. In 2009 the fund returned 47.5%, considerably more than the overall equity markets. The ETF’s tracking error was high in both years: –3.2% in 2008, and –1.5% in 2009. So far in 2010 it has returned just over 6%, most of which has come from its monthly distributions (the fund currently yields 4% annually). The ETF hedges foreign currency exposure, so the index returns are measured in Canadian dollars.

In the liquidity department, this ETF has some concerns. Given the wild popularity of dividends these days, I’m surprised the daily trading volume averages only about 13,000, compared with more than 100,000 for Claymore’s S&P/TSX Canadian Dividend ETF. It’s also common to see a large gap between the fund’s net asset value (NAV) and its market price. If you’re considering investing in CYH, you’d be wise to place a limit order.

The alternatives: No other Canadian ETF provider offers an international dividend-focused index fund. However, Horizons AlphaPro recently launched the actively managed Global Dividend ETF (HAZ), which is approximately 50% in US stocks, 11% Canadian and 39% international.

There are innumerable ETFs in this category from US providers such as Vanguard, iShares, PowerShares, State Street Global Advisors and WisdomTree.

Bottom line: CYH has a lot to offer investors who are looking to earn current income in a non-registered account, such as retirees who are living off their portfolio. The fund allows these investors to diversify outside Canada and get extremely favourable tax treatment on a healthy 4% yield.

However, it is far less attractive for investors who do not need current income or the tax-advantaged structure — which includes anyone investing an RRSP. The actively managed Zacks index is completely opaque, and the forward structure adds an extra layer of complexity and cost that is unnecessary in a tax-sheltered account.

There’s also no reason to focus on dividends in an RRSP, where total return is all that matters. With that in mind, you can get much more complete exposure to US and international equities at a fraction of the cost with truly passive broad-market ETFs.

Disclosure: I do not own CYH in my own portfolio. The US and international equity holdings in my RRSP are Vanguard ETFs.

16 Responses to Under the Hood: Claymore Global Monthly Advantaged Dividend ETF

  1. Eric November 15, 2010 at 11:56 am #

    ”There’s also no reason to focus on dividends in an RRSP, where total return is all that matters.”

    WOW ! Dividends have historically accounted for 40% of that total return. I’m glad I did focus on dividend stocks since 1996.

    As for CYH, I would not recommend it for the bulk of international equity exposure but it’s interresting. One year market return is better than VT (as of 10-31-2010) and region allocation is similar.

  2. Canadian Couch Potato November 15, 2010 at 1:10 pm #

    @Eric: I know this sounds like heresy today, but there is no evidence that screening stocks according to their yield will provide reliably higher returns than investing in the broad market. This is just another form of active management.

    In the absence of a dividend tax credit (such as in an RRSP, or when investing in foreign equities), investors should focus on total return. If 40% of returns come from dividends, the other 60% comes from capital growth, so the highest expected returns should come from a balance of mature dividend-paying companies and non-dividend-paying stocks with more potential for growth. That’s what you get with a broad-market index fund.

    The one-year return of CYH, or any other fund, is meaningless. If you do want to look at some recent performance data, though, have a look at WisdomTree’s products. They are almost all focused on dividends, since they launched in 2006 their results have been underwhelming.

  3. Eric November 16, 2010 at 12:52 am #

    @CCP: Dividends are very important to estimate future returns. If dividends have historically accounted for 40% of the total market return and the dividend yield of the S&P 500 is 2.5 %, you’ll get around 6% . The dividend yield is a very good indicator of the value of an index. Many investors forgot about it in the late 90’s (the div. yield for the S&P was less than 1% in 2000) and we all know how it ended. The dividends from strong companies were the only returns for the last 10 years (1.3 % – 10 years for VTSMX as of 11/15/2010). Dividend investing is just another tool for a well balanced portfolio.

  4. Jerry Neudorf November 16, 2010 at 1:26 am #

    Thank-you for the very useful site.

    There are indeed “innumerable ETFs in this category”. I would like to chose just one USA dividend focussed fund and one other for international dividends. Vanguard VIG would seem to fit the bill for the former but could you narrow the field a little by listing a few funds which would fit the latter requirement? This is not a request for a recommendation, just for a little help in trawling the possibilities.

  5. Canadian Couch Potato November 16, 2010 at 8:36 am #

    @Jerry: Million Dollar Journey has done a nice roundup of these:
    http://www.milliondollarjourney.com/international-dividend-etfs.htm

    Hope that helps!

  6. John November 16, 2010 at 11:23 am #

    Canadian Couch Potato
    I current hold approx. $80,000. in a RRSP in the form of GIC’s with a bank earning next to nothing. I am looking to re-invest this money for more return, would the
    Vanguard Dividend Appreciation ETF work for me?

  7. Canadian Couch Potato November 16, 2010 at 11:42 am #

    @John: I’m sorry, I can’t give advice like that to individuals. All I will say is that you should understand that dividend paying stocks are dramatically more risky than your GICs, so make sure you don’t just look at the yield when you make your decision.

  8. Original Sean November 17, 2010 at 11:43 am #

    Very good post. Thanks.

    Personally, I would not invest in this fund. The MER is too high and open ended (like most Claymore funds, I might add). Compare this to the new HXT from Horizon that uses a similar strategy but for local stocks (MER 0.08%). If you must go foreign – choose Vanguard ETFs.

  9. Canadian Couch Potato November 17, 2010 at 12:28 pm #

    @Sean: It should be pointed out that the CYH and HXT are apples and oranges. CYH is an international equity fund designed to deliver high yield, while HXT is a Canadian equity fund specifically designed to pay no yield (it, too, uses a forward agreement to avoid taxable distributions). So it’s not correct to say they use a similar strategy.

  10. mike November 25, 2010 at 5:09 pm #

    Just an fyi on a misunderstood characteristic of ETF’s. The liquidity of an ETF is not determined by the trade volume of the ETF, but by the trade volume of the underlying components being tracked. In short a newer ETF tracking the TSX60 has high liquidity regardless of the trade volume of the ETF itself. Conversely a small cap ETF may have hidden liquidity issues even it the fund itself seems to have high trade volumes, since the underlying small cap stock components may have limited liquidity.

  11. Canadian Couch Potato November 25, 2010 at 7:04 pm #

    @Mike: Thanks for the comment. Your point is true in theory, but in practice, market makers do not always do a good job of keeping tight bid-ask spreads on thinly traded ETFs.

  12. ETFnewbie January 17, 2011 at 2:49 pm #

    Hi – I have no annual RRSP room at present and therefore am working towards converting non-registered investments into TFSA investments, thus the following question. I understand your comments regarding inappropriateness of using CYH in an RRSP, where tax treatment is irrelevant. But I am interested in diversifying our TFSA holdings into US and international dividend-paying ETFs/stocks and getting around the problem that withholding tax is still collected (unlike in RRSPs), but one cannot claim the foreign tax credit when held within a TFSA. Wouldn’t CYH be a way to obtain foreign exposure in a TFSA and avoid withholding tax?

  13. Canadian Couch Potato January 17, 2011 at 7:08 pm #

    @ETFnewbie: Yes, CYH would save you the 15% withholding tax on dividends if held in a TFSA. However, the additional cost of the forward structure and other fund expenses might overwhelm this benefit. Holding US-listed ETFs directly might be less expensive over the long term.

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