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Invesco KBW High Dividend Yield Financial ETF Is Slightly Undervalued, But Visibility Is Still Limited

Published Wed, 18 Sep 2019 07:53:44 -0400 on Seeking Alpha

ETF Overview
Invesco KBW High Dividend Yield Financial ETF (KBWD) focuses on small-cap high-dividend financial stocks in the U.S. The fund tracks KBW Nasdaq Financial Sector Dividend Yield Index. Nearly half of its portfolio are mortgage REITs which may perform poorly when the yield inverts. While KBWD's stocks appear to be undervalued, the yield spread has not turned back to positive territory. The risk and reward profile does not appear attractive enough for us to consider yet. Hence, we think investors can wait on the sidelines until better visibility is seen.

Data by YCharts
Fund Analysis
A portfolio of 42 small-cap financial stocks
Although not one stock represents over 5% of the entire portfolio, its entire portfolio is concentrated in only 42 stocks. These are small-cap stocks that tend to be more volatile than the broader market. Small-cap stocks are like small boats. When a wave comes, investors will feel the wave. Therefore, expect these stocks to be much more volatile than the broader market.

Source: Seeking Alpha Website
KBWD has high exposure to mREITs
As the table below shows, nearly half of KBWD's portfolio is related to mortgage REITs. Mortgage REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities (MBS) and earning income from the interest on these investments.

Source: Morningstar
Like other financial institutions, mREITs in KBWD's... Read more