(Bloomberg) — A new Wall Street ETF is offering investors a new way to extract income from the world of stocks by targeting an unlikely index: the Nasdaq 100.
Issuer Pacer ETF Distributors last week debuted a product that offers exposure to technology companies — more famous for furnishing growth than dividends — alongside increased income from the futures market. It joins a wave of new funds that offer a host of different ways to generate reliable income streams from stocks of all levels, often at the price of underperforming the broader market in a bull cycle.
The Pacer Metaurus Nasdaq 100 Dividend Multiplier 600 ETF was launched on the QSIX index. It looks set to give investors 85% exposure to the tech index, with the remainder used as collateral to buy dividends in the futures market in a bid to extract six times what the Nasdaq 100 would pay. It's also a bet that tech stocks will start returning money to holders through dividend payments rather than spending it on share buybacks or research and development amid the AI boom.
Other sectors, such as utilities and real estate, already pay much higher dividends. But Sean O'Hara, Pacer's president, argues that tech giants like Apple Inc. or Microsoft Corp. are strapped for cash and will inevitably increase their wages.
“When you think about technology in the Nasdaq, there is a distinct opportunity because the big names in the index generate so much money that they have to do something with it,” he said. “And I suspect that over time most, if not all, will eventually start paying dividends.”
The Nasdaq 100 is currently projected to pay a dividend yield of about 0.8% over the next year, compared with 1.4% for the S&P 500, data compiled by Bloomberg show. But investors – especially stay-at-home investors – are drool over income generation strategies.
Currently, investors looking for yield can turn to dividend funds or those that use derivatives to generate and distribute payments.
Derivative-based funds – a group that includes products based on single companies, as well as so-called “buffer” ETFs that protect investors from falling prices, as well as leveraged funds – are increasingly popular. The class has raised more than $43 billion in the year to Sept. 26, while 151 new funds have been launched. That compares with about $36 billion in introductions and 150 new products in all of 2023, according to data compiled by Athanasios Psarofagis of Bloomberg Intelligence.
Often times, however, investors are giving up larger gains in a stock or index in exchange for upfront payments.
As these products proliferate, critics are warning that many of them, including leveraged funds or inverses with a stock based on a single company, are risky given their volatility. Many have followed the broader market while charging significantly more in fees. QSIX charges a fee of 0.6%, which compares with the average rate of 0.5% across all ETFs, according to data compiled by Bloomberg.
While other strategies that offer this trade-off are structured in such a way that investors give up valuation for a higher income stream, Pacer is looking to avoid investors taking a big performance hit, according to O' Hara. Products in this category often use options to achieve their leverage targets, for example, and reset daily. This can hurt performance because the daily rebalancing of an option book falls back over time. QSIX, instead, uses futures contracts to reach for increased dividends — rather than leverage — something Pacer noted in its announcement of the fund's launch.
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Pacer is not new to this category. In 2021, it debuted the Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF, which has a similar structure to the QSIX but targets four times the dividends on S&P 500 stocks.
Flows to the fund, which trades below QDPL, began to pick up earlier this year as the boom in income-generating products accelerated. So far this year, QDPL has taken in more than $250 million, putting it on track for the best annual entry with its assets are over 500 million dollars. However, the ETF's 20% return in 2024 trails the S&P 500's 22% gain.
The new fund aims for a larger multiple — versus the four times offered by the S&P 500-based fund — because Nasdaq 100 dividend futures are cheaper to buy, according to O'Hara.