CDC ETF: Large Cap Dividend Exposure With Less Risk? Not So Sure


  • CDC is another in a long list of ETFs that are built to reduce risk to the equity markets without sacrificing a bunch of the upside.
  • The ETF has a rule-based algo to reduce risk as the market hits key metrics.
  • The strategy is the opposite of the Columbia Thermostat fund which reduces risk as the market rises.
  • Looking for more investing ideas like this one? Get them exclusively at Yield Hunting: Alt Inc Opps. Learn More »

Business on Wall Street in Manhattan

Pgiam/iStock via Getty Images

(This report was first published to members of Yield Hunting on Sept 26, 2022).

VictoryShares US EQ Income Enhanced Volatility Wtd ETF (NASDAQ:CDC)

(Terrible name. Could they make it any longer?)

This fund is a rule-based ETF that attempts to provide dividend income with far less downside risk. Investors who want exposure to high-yield large-cap stocks that has positive net earnings in the last year will want to look at this fund. Why? Because it offers a disciplined and balanced investment approach to manage risk by reducing equity exposure during periods of heightened market volatility.

The investment strategy is: seeks to provide investment results that track the performance of the Nasdaq Victory US Large Cap High Dividend 100 Long/Cash Volatility Managed Index before fees and expenses. Clearly, this is their proprietary index.

So what does the index do?

  • Selects the highest 100 dividend-yielding stocks in the Nasdaq Victory US Large Cap 500 Volatility Weighted Index, which first:
    • Screens for profitability - Must have positive net earnings across the last twelve months ‒ Selects the largest 500 stocks by market capitalization
    • Weights stocks based on risk/volatility (standard deviation over the last 180 trading days)
    • Reconstitutes twice a year (March and September)
    • Automatically reduces its exposure to the equity markets during periods of significant market declines and reinvests when market prices have further declined or rebounded

How does it reduce downside risk?

The index it tracks is a rules-based strategy that adjusts allocations between stocks and cash. The goal is an unemotional, systemic, and potentially tax-efficient process without human interference, that reduces equity exposure and reinvests as prices decline.



During periods of significant market declines of 8% or more from the index's all-time high, the ETF starts to withdraw from the market only getting back in during a recessionary drop off of 40% or more.

In other words, the fund is 100% invested if the index is within 8% of its all-time highs. It keeps that allocation under normal market conditions until the index is down 8%. Upon reaching that threshold, it would then take off 75% of its equity exposure and be 25% in the index and 75% in cash.

Upon reaching a -16% drawdown, the fund would then add back 25% of its equity exposure back into the index to be 50% index and 50% in cash.

Again, once a larger drawdown is reached of -24%, the fund would then add another 25% exposure into equities with the resulting allocation being 75% equities and 25% in cash.

Lastly, once the recessionary environment is reached of -32%, then the fund would be back to fully invested.

The obvious question is, what happens if the index falls, say -23% and then recovers (something akin to this current market)? When does it get back to fully invested?

As the market recovers and the index gets within the 8% of the all-time high, it will reallocate back towards equities and be 100% invested.

Also, the changes in the allocation are done only at the month end. So if the index falls by 10% in two weeks and then recovers, no changes would be made to the allocation within the fund.

The other obvious question is what is the capital invested in when it is sitting in cash? The prospectus states that it will be put into 3-month treasury bills where the current yield is 2.18%.

During any periods of significant market decline, when the Index's exposure to the market is less than 100%, the cash portion of the Index will be invested in 30-day U.S. Treasury bills or in money market mutual funds that primarily invest in short-term U.S. Treasury obligations.

Performance So far...

The fund has been around for 8 years so we actually have quite a bit of performance history to go off of. Remember though, this is a weighted average of the 100 highest dividend stocks in the Nasdaq. So it is not a 100% comparison to the QQQs or Nasdaq index. Below, we can see the comparison since inception between the QQQ index and the ETF.



A better comparison would be the Invesco S&P 500 High Div Low Volatility Portfolio ETF (SPHD), even though the underlying index is the S&P 500, not the Nasdaq. The correlation to the Nasdaq High Dividend Low Volatility index is much higher due to that focus on higher yielding stocks and lower volatility, something the Nasdaq doesn't actually have a lot of.

Below are the results that show a tight correlation until the Nasdaq outperformance started right after the Covid Crisis. However, the interesting thing is that while the index moves higher sharply, it does not show the same decline that the QQQs (Nasdaq) has experienced in 2022. That is most evident in the chart above. So it didn't participate as much to the upside but it had almost no participation to the downside. That is what an investor geared towards lower volatility and risk aversion would want to see.



Concluding Thoughts

It's hard to ascertain whether or not this ETF has done its job or not. There is no corresponding ETF without the reallocation strategy to compare it to. That said, we can compare it to several other options in the large cap US space with strategies that are an attempt to mitigate losses.

I compared it to a few other ETFs that have similar or slightly different goals and objectives. Those include: DRSK, NUSI, SPYC, TAIL, CBHAX, and XRMI. CDC looks the best under this limited time frame.



If we look at the fund compared to simply the S&P 500, you can see that the two are on top of each other. And this over a time period of nearly 7 years which encapsulates two large drawdown recessions.



Like I said, this is one I'll keep on my radar but the conclusion is not apparent yet. To me it seems something that will reduce risks around the edges but does not mitigate it to a large extent.

Our Yield Hunting marketplace service is currently offering, for a limited time only, free trials.

Our member community is fairly unique and focused primarily on constructing portfolios geared towards income. The Core Income Portfolio currently yields over 8% comprised of closed-end funds. If you are interested in learning about closed-end funds and want guidance on generating income, check out our service today. We also have expert guidance on individual preferred stocks, ETFs, and mutual funds.

Check out our Five-Star member reviews.

Click here to learn more.

This article was written by

Alpha Gen Capital profile picture
Targeting 8+% Income Stream using CEFs, ETFs, Munis, Preferreds and REITs
Yield Hunting: Alternative Income Opportunities is a premium service dedicated to income investors who are searching for yield without the high risk of the equity market. We are one of the top experts in closed-end funds ("CEFs") in the country having spoken at many national conferences on how to incorporate CEFs into client portfolios. We manage four portfolios that investors can follow:

- YH Core Income Portfolio: yield ~8%
- YH Flexible Income Portfolio: yield 7.53%
- YH Taxable Core Portfolio: yield 5.24% (some tax free)
- YH Financial Advisor Model

Plus: Muni CEF Shopping List.

Our team includes:

1) Alpha Gen Capital - I am a former financial advisor and investor. Not someone from another career doing this on the side. My analysis is meant to provide safe and actionable insight without the fluff or risky ideas of most other letters. My goal is to provide a relatively safer income stream with CEFs and mutual funds. We also help investors learn about investing and how to properly construct a portfolio.

2) George Spritzer - Another career financial guru who runs a registered investment advisor with a specialization in closed-end funds for individuals. George uses the following investment strategies:1) Opportunistic Closed-end fund investing: Buy CEFs at larger than normal discounts to NAV and sell them when the discounts narrow. 2) Exploit special situations: tender offers, fund terminations, fund activism, rights offerings etc.

3) Landlord Investor- spent his career as a management consultant for public sector clients at a multinational consulting firm in the DC area. He has transitioned to a new career as a full time landlord. His investment portfolio is comprised of two parts -- broad-based index funds and income plays such as preferred stock, CEFs, and REITs. He also owns individual/baby bonds which he buys on margin to boost total return. Landlord is our 'individual preferred stock' expert analyst.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Recommended For You

Comments (2)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.