QDPL Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF

[invest2bfree]

The Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF is an innovative fund that uses dividend futures to boost the fund's distribution yield.
QDPL aims to provide 4 times the yield of the S&P 500 Index with a modest reduction in equity exposure.
The fund has promised 85-90% of the returns of the S&P 500 Index and over 4 times the distribution yield.


What kind issues will we face with this ETF?

It has been 2 years and it has acquired only 200million in Assets.

I like dividends so this is best of both worlds for me.

Expense Ratio
0.79%

[invest2bfree]

Anyone?

[retired@50]

What kind issues will we face with this ETF?

It has been 2 years and it has acquired only 200million in Assets.

Expense Ratio
0.79%

I think you've answered your own question.

The issue(s) are the high ER and the low AUM.

Funds like this that don't tend to "take off" in popularity wind up getting closed or merged. If in a taxable account that can certainly be an unwelcome development.

Regards,

[Old Miser]

I have been thinking about QDPL for a while. The ETF aims to put 85-90% of the assets in the S&P 500, buy US Treasuries with the remaining 10-15% of assets, and then use the US treasuries as collateral to purchase dividend futures on the S&P 500. So, to look at this in round numbers and in laymen’s terms, you are getting 90% of the standard dividend through the actual shares in the S&P 500. So, you need to make about 3% more in futures fees to have a total payout of 4%. But, if they can make a cash payout of 3% of the total investment with futures contracts on only 10% of the investment, why wouldn’t they just buy futures on 100% of the investment and have a 30% cash payout return and not invest anything in the actual S&P 500? The 30% payout of course sounds too good to be true and probably is not feasible or at least sustainable. If you could not make this return on 100% of the funds through futures how can you do it on the 10% of the investment. I hope I was able to state my thoughts and am disappointed there has been so little discussion here about this ETF. If you disagree please state so and why, as I would think if QDPL can meet its objectives over the long haul it is an interesting ETF. By the way, over the last four years since inception, it appears to be performing as advertised. But, I am skeptical that there is some hidden risk in the dividend futures that will one day bite investors.

[Random Musings]

For this fund, the victor of the Battle of the Metaurus has already been decided.

RM

[nisiprius]

I don't get it. What's "interesting" about it? Its total return has been virtually identical to--actually a little smaller than--that of the Vanguard 500 index fund, VOO. If the total return is the same, why do you care whether you are getting it through dividends or price-per-share growth? A dollar is a dollar, whether you pull it out by placing a "sell" order or it pushes it out by paying a dividend.

Exactly what can you do with QDPL that you can't do just as well with VOO? Possibly by placing an automatic sell order of $X/month on VOO?

Source

[nisiprius]

I'm guessing QDPL can meet its stated objectives. My problem is that I don't see how they align with an investor's objectives, or do I understand in what way it's superior to investing in a regular S&P 500 index fund and engaging automatic withdrawals of what you think is an appropriate amount. QDPL is logically equivalent to investing in an ordinary S&P 500 index fund together with auto-withdrawals of 4X dividends. That exact automatic withdrawal strategy isn't available at brokerages, of course, but I don't think it's a particularly good one.

1) Either I do not understand what they mean when they say it "modestly lower exposure (approximately 90%) to the S&P 500 Index performance," or it hasn't come anywhere near meeting that. It's clear from their chart that they are referring to the price index. (90% of the growth index would be harder to meet).

I notice that the "modestly lower exposure (approximately 90%)" language is not mentioned anywhere in the summary prospectus or the prospectus. The official literature says only that it's "designed to give the Fund exposure to approximately 400% of the ordinary dividends," period. No expectations are set for what might happen to the capital in the fund if the dividends are spent.

Using testfol.io to show results with "invest dividends" turned off, we can see the results of investing $10,000 into QDPL and the Vanguard 500 Index ETF, VOO, at inception of QDPL. (VOO without dividend reinvestment is essentially equivalent to the regular S&P 500 index, i.e. the price index).

Source



I haven't checked but I assume QDPL did its job of providing 4X the dividends of VOO. But it didn't come close to giving you 90% of S&P 500 price returns.

During that time period, VOO grew by $3,747.94, while QDPL only grew by $1,442.85. That isn't "modestly less." Drawing 4X dividends was a major hit on the growth of the holding; it was only 38% of VOO's, not "approximately 90%."

Even if what they mean is that if QDPL and VOO investors spend the dividends, at any point QPDL investors should see approximate 90% of what VOO investors see as value of their holdings, it didn't do that, either. 90% of $13,747.94 = $12,373.15.

2) 400% of dividends is an aggressive withdrawal rate. I wouldn't want to risk that high a rate, i.e. I don't think a spend-400%-of-dividends is a safe withdrawal strategy.

According to Pacer's own materials, S&P 500 dividend yield has been running around 2% since 2004:



400% of 2% is 8%. So if you spend the 4X the dividends of the S&P 500, over the last two decades that would have been equivalent to an 8%-of-portfolio withdrawal rate.

These are the annual withdrawals and end-of-year portfolio values would have been, if you had started with $1 million in the Vanguard 500 Index Fund and, at the start of each year, withdrawn 8% of the current portfolio value.



The annual withdrawals would have varied by nearly a factor of two from best to worst years, and would not have up with inflation.



S&P 500 returns would not have been enough to maintain real portfolio value in the face of 8% withdrawals.

Someone more ambitious than me can try doing these calculations using the actual S&P 500 dividend yields. In the last years, but only in the last few, Pacer notes that "the recent rally of the market has further compressed yields to around 1.3%," and the actual fund distribution yield has been lower:

[alex_686]

1) Either I do not understand what they mean when they say it provides 400% of the S&P 500 ordinary yield "in exchange for modestly lower exposure (approximately 90%) to the S&P 500 Index performance," or it hasn't come anywhere near meeting that. It's clear from their chart that they are referring to the price index.

It is relatively easy to understand.

Dividends is what gets reported to on your 1099. It is a income tax concept. It is fairly easy to manipulate. Personally, I don’t know why they stopped at 400%. It is just as easy to do 1000%.

Dividends and returns don’t have much to do with each other.

[nisiprius]

1) Either I do not understand what they mean when they say it provides 400% of the S&P 500 ordinary yield "in exchange for modestly lower exposure (approximately 90%) to the S&P 500 Index performance," or it hasn't come anywhere near meeting that. It's clear from their chart that they are referring to the price index.

It is relatively easy to understand.

Dividends is what gets reported to on your 1099. It is a income tax concept. It is fairly easy to manipulate. Personally, I don’t know why they stopped at 400%. It is just as easy to do 1000%.

Dividends and returns don’t have much to do with each other.

4X dividends I understand. It's the "approximately 90% of the S&P 500 index performance" I don't understand. I edited my post above to clarify this. The pitch seems to give impression that you can get and spend 4X dividends with very little impact on the growth of your capital. In fact you're eating seed corn, and you're eating 4X as much seed corn as you would if you spent the dividend on a regular S&P 500 fund.

As I say, the "modestly lower exposure... 90%" language is on their presentations and factsheets, but not in the prospectus.

I don't know if it's possible in an ETF, but notice that you could seemingly get exactly the same result from a straight S&P 500 portfolio, and it would be possible for a fund company to do it in a mutual fund--since it's exactly what both Vanguard (Managed Payout) and Fidelity (Income Replacement Funds) once did: invest in some simple portfolio, but distribute amounts based on a mathematical formula, sometimes more and sometimes less than fund performance. A Managed Payout fund of some kind could choose to distribute 4X dividends.

[alex_686]

It is relatively easy to understand.

Dividends is what gets reported to on your 1099. It is a income tax concept. It is fairly easy to manipulate. Personally, I don’t know why they stopped at 400%. It is just as easy to do 1000%.

Dividends and returns don’t have much to do with each other.

4X dividends I understand. It's the "approximately 90% of the S&P 500 index performance" I don't understand. I edited my post above to clarify this. The pitch seems to give impression that you can get and spend 4X dividends with very little impact on the growth of your capital. In fact you're eating seed corn, and you're eating 4X as much seed corn as you would if you spent the dividend on a regular S&P 500 fund.

As I say, the "modestly lower exposure... 90%" language is on their presentations and factsheets, but not in the prospectus.

I don't know if it's possible in an ETF, but notice that you could seemingly get exactly the same result from a straight S&P 500 portfolio, and it would be possible for a fund company to do it in a mutual fund--since it's exactly what both Vanguard (Managed Payout) and Fidelity (Income Replacement Funds) once did: invest in some simple portfolio, but distribute amounts based on a mathematical formula, sometimes more and sometimes less than fund performance. A Managed Payout fund of some kind could choose to distribute 4X dividends.

You are not missing much.

Sure, they imply that you can spend 4x but that is all they can do - imply. People think lots of wrong things about dividends.

As a mild example, I hold the stocks of the S&P 500 index. Then right before a stock goes ex-dividend I sell my Berkshire and other non-dividend stocks and buy the dividend paying stocks, collected the dividends, then reverse the transactions - sell the dividend stocks and buy back Berkshire et. al.

As such, you can manage your portfolio to get about the return. Not exactly but being out of Berkshire for a day or 3 won’t cause a huge difference. Hence the 90% claim. Now, stocks down the amount of the dividend, so you are not going to increase performance. But you are able to generate a nice big 1099-DIV.

[nisiprius]

I just don't see what the point is in using financial engineering with derivatives to achieve something that can be so easily achieved without them. Invest in an S&P 500 index fund. If you like, turn off dividend reinvestment and spend the dividends. If you want more, withdraw more, whatever you think will be sustainable. 4X dividends if you think so. Brokerages theoretically could, but don't, give you a way to automate this; but you can do automatic withdrawals of a specific dollar amount and adjust annually.

Are investors in QDPL just engaging in a charade, in which 4X dividends is thought to be guaranteed to be sustainable--because you are never literally "selling shares," and because the payout of the financial strategy is called an ETF "dividend?"

Even if you make the reasonable supposition that corporate management knows how to, and can be relied on, to set the dividend at a sustainable rate. Certainly, "spend the dividend" is sustainable in the sense that it cannot spend the portfolio down to zero. But there's no reason to suppose that 4X dividends is sustainable in the sense of keeping up with inflation over the long term.

And nothing about going roundabout through derivatives changes the math that total return = capital appreciation plus dividends.

Do you see how QDPL does anything for investors beyond automating a "4X dividend" withdrawal strategy?

[nisiprius]

Also, alex_686... this is the first time I can recall seeing a specific "aim" statement in a factsheet--



that was not echoed anywhere at all in the prospectus. I'm referring to the "approximately 90%" language. The factsheet doesn't even have the usual disclaimer that that "the fund may not achieve its aim." I get it that the prospectus is the only legally binding document, but are they allowed to declare "aims" in a factsheet that are not declared in the prospectus?

[alex_686]

Are investors in QDPL just engaging in a charade, in which 4X dividends is thought to be guaranteed to be sustainable--because you are never literally "selling shares," and because the payout of the financial strategy is called an ETF "dividend?"

Yes, just a charade. Educating clients is very hard. Do hard that you tend to loose clients to other firms.

... But there's reason to suppose that 4X dividends is sustainable in the sense of keeping up with inflation over the long term.

I will contest that. This isn’t a safe assumption. There are a fair number of firms out there in zombie mode, milking cash as they decline into oblivion. Oil wells and a fair number of value firms come to mind.

[alex_686]

Also, alex_686... this is the first time I can recall seeing a specific "aim" statement in a factsheet--



that was not echoed anywhere at all in the prospectus. I'm referring to the "approximately 90%" language. The factsheet doesn't even have the usual disclaimer that that "the fund may not achieve its aim." I get it that the prospectus is the only legally binding document, but are they allowed to declare "aims" in a factsheet that are not declared in the prospectus?

I am out of the mutual fund businesses these days. Yes, I have seen similar language in terms of aims. Total return bond funds come to mind - earn returns regardless of the underlying market.

Never seen something as specific as the 90% language before.

[nisiprius]

... But there's reason to suppose that 4X dividends is sustainable in the sense of keeping up with inflation over the long term.

I will contest that. This isn’t a safe assumption. There are a fair number of firms out there in zombie mode, milking cash as they decline into oblivion. Oil wells and a fair number of value firms come to mind.

Typo. I definitely meant to say "there's NO reason to suppose that 4X dividends is sustainable." Sorry!

[alex_686]

Typo. I definitely meant to say "there's NO reason to suppose that 4X dividends is sustainable." Sorry!

But look, one can’t even make the assumption that 1x divided is sustainable. Or 1/4 dividends.