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KBWD: Steepening Yield Curve Is Positive, But Dividend Does Not Adequately Compensate For Risk

Harrison Schwartz profile picture
Harrison Schwartz


  • KBWD is an ETF that invests in smaller lending institutions that pay very high dividend yields.
  • While the fund has a dividend yield of over 9%, its expected purchasing-power return is far lower when you account for principal drag, taxes, and inflation.
  • The fund's relative performance is tied directly to the shape of the yield curve. As the curve steepens, it is possible that KBWD outperforms the S&P 500.
  • However, growing credit risk today largely offset the curves bullish trend and indicates a growing downside risk for KBWD.
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The Invesco KBW High Dividend Yield Financial ETF (NASDAQ:KBWD) invests in smaller companies in the financial industry that pay high dividends. The fund currently boasts a very high yield of 9.7% which makes it one of the highest yielding ETFs on the market today.

In theory, I love this ETF. It has cheap stocks with high dividends that should make it a long-run outperformer. That said, most of its holdings are mortgage REITs, business development companies, boutique investment banks, and insurers, all of which carry significantly higher-than-normal liquidity and credit risk. Thus, investors may want to hold off on buying the stock until the smoke clears in the equity market.

An Update on the Yield Curve

As explained in previous Seeking Alpha articles, the ETF has very high exposure to the yield curve as most of its holdings borrow at short-term rates and lend at much higher yield loans with a long-term maturity. While the yield curve does appear to be returning to a steepening phase, most of the companies in KBWD operate at extremely high leverage which means that interest-rate volatility could prove deadly.

Still, the current pattern of the yield curve generally indicates outperformance. To demonstrate, first take a look at the relatively strong correlation between the curve and the relative performance of KBWD to (SPY). This relative performance is shown through their total-return-ratio.

ChartData by YCharts
ChartData by YCharts

As you can see, the ratio may be finding support just as the curve has made its bottom. Further, it is generally clear that the two are correlated. Of course, this is because the profits of companies in KBWD are directly dependent on the curve since it determines the net-interest-margin available on lending.

Now, the yield curve has made many false-bottoms before over the past decade. Most notably in 2016 during

ChartData by YCharts

ChartData by YCharts

ChartData by YCharts

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This article was written by

Harrison Schwartz profile picture
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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