Bond Alternatives Picking Up Steam

Now that the Federal Reserve is set on slowly normalizing interest rates as the economy continues to expand, investors may look to alternative investment options such as a dividend growth exchange traded fund that acts more like a steady bond strategy.

Investors may consider the actively managed Reality Shares DIVS ETF (NYSEArca: DIVY), which tries to provide exposure to the growth rate of expected dividends and looks to deliver long-term capital appreciation rather than income and yield through options contracts and dividend swaps.

“DIVY is not a stock alternative, it is a bond alternative,” Eric Ervin, President and CEO of Reality Shares, told ETF Trends in a call.

Through its targeted dividend growth strategy, DIVY may produce low-volatility and low market correlation that helps stabilize an investment portfolio. For instance, the ETF has shown a -0.09 correlation to the Barclays U.S. Aggregate Bond Index, a 0.40 correlation to the HFRX Global Hedge Fund Index and a 0.29 correlation to the S&P 500 Index, reflecting an almost neutral correlation to U.S. bonds and slight positive correlation to U.S. stocks.

“DIVY is designed to perform throughout virtually any market environment,” Ervin said. “Because it was designed to have a lower volatility than the S&P 500 while exhibiting higher returns than bonds, DIVY serves as a potentially effective replacement for part of your bond portfolio allocation.”

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Moreover, risk-adverse investors may also like to know that DIVY has shown historically low volatility, exhibiting daily moves of over 1% only 14 days since inception, compared to the 118 days with 1% moves in the S&P 500.

“As a low volatility strategy that can be used to replace fixed income, DIVY offers capital appreciation potential that has consistently delivered low correlation and low drawdowns across market environments,” according to RealityShares.

While DIVY only returned 8.0% year-to-date, slightly underperforming the equities market, the alternative ETF strategy provides limited volatility for those more faint of hear, especially as we witnessed huge market swings in recent years. DIVY exhibits high Sharpe Ratio and a small standard deviation, reflecting the fund’s attractive risk-adjusted returns.

“DIVY is a strategy that would produce 5% to 6% long-term returns without a whole lot of volatility,” Ervin said.

DIVY is not your traditional dividend ETF strategy. The actively managed fund looks to capture dividend growth via an array of strategies in an effort to generate long-term capital appreciation. DIVY’s holdings can include listed option contracts, dividend swaps, futures and forwards on indexes of Large Cap Securities or exchange traded funds designed to track large cap securities indexes.

The active ETF can purchase index options contracts in an effort to adapt to changes in the expected dividend values reflected in the option prices. These option combinations are designed to reflect expected dividend values and eliminate the Fund’s exposure to changes in the trading prices of the Large Cap Securities.

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“Institutional investors have been investing in dividend growth for more than 15 years, but DIVY is the fist isolated dividend growth strategy offered in an easily tradable ETF,” Ervin added.

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