DDM aims to double the performance of the Dow30 through 2x leverage. Wouldn’t it follow that the dividend yield is also doubled?
No, because they are using derivatives to double (on a daily basis) the total return of the index. I’m just taking a guess. Anyone know for sure?
“The investment seeks daily investment results, before fees and expenses, which correspond to twice the daily performance of the Dow Jones Industrial Average. The fund normally invests 80% of assets in financial instruments with economic characteristics that should be twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective. The fund is nondiversified.” I originally thought the fund simply used leverage to double the performance and no derivatives, but yes, derivatives are used to make it perform as such. 15% of the fund is in swaps. The yield is slightly higher than DIA.
Yield on double Dow should be significantly lower than single Dow. Think about the swap where you are paying LIBOR and receiving Dow. LIBOR is higher than Dow dividends so without Dow price appreciation, you are paying out the difference between Dow dividends and LIBOR.
Joey - yes, but aren’t we forgetting about the return on the collateral? The dividend could be higher or lower on the 2x fund vs. the 1x fund depending on the difference between the dividend yield on the underlying and the return on collateral. Approximately 85% of the equity in these leverage funds buys the underlying stocks; the rest goes to collateral for the total return swaps, as I understand it. So, you get 85% of the dividend yield + whatever that 15% earns. Yield on DDM - 1.97% Yield on DIA - 2.37% (per Morningstar)
Correction to my comment: DDM is at 1.97% and DIA is at 2.46% yield. Makes sense given the cost of borrowing and derivatives. Thanks guys.
Play DXD when they rally this biatch to 12000…YW
XSellSide Wrote: ------------------------------------------------------- > Joey - yes, but aren’t we forgetting about the > return on the collateral? Only if they invest the collateral in risky assets. Given this level of margin, they don’t. > The dividend could be > higher or lower on the 2x fund vs. the 1x fund > depending on the difference between the dividend > yield on the underlying and the return on > collateral. Not so if you get risk free (or AA or repo or whatever you call the implied yield on futures collateral). > Approximately 85% of the equity in > these leverage funds buys the underlying stocks; > the rest goes to collateral for the total return > swaps, as I understand it. So, you get 85% of the > dividend yield + whatever that 15% earns. > > Yield on DDM - 1.97% > Yield on DIA - 2.37% > (per Morningstar) ^That seems about right. It really doesn’t make much difference if you have a 15% collateralized investment in a futures contract or enter a swap for 100M when you put 15M in the bank. You should get the same return on those things.
anyone know of any funds that do double the yield on an index?
Sure there’s the Vanguard Free Interest Leverage Fund and the Fidelity Money For Free Fund and …
juven - I don’t think there is an fund that explicitly doubles the dividend, but there are ETFs and funds with a dividend focus (veipx, des, pid, etc.).
Juven - There really is a fundamental thing you are missing here. If you own stocks you get dividends. Suppose that there was some investment out there that returned 2* price moves and 2 * yield on an index. I would borrow $1M, buy $1M worth of that security and then I would short $2M worth of the index. On my short, I would get interest on $2M, pay dividends on $2M and get negative price moves on $2M worth of the index. On my leveraged fund, I would get the same dividends I pay, the exact offsetting price movement, and pay interest on $1M. The net there is that I am getting free interest on $1M. Since we know that can’t happen, there just isn’t such an investment. These no-arbitrage arguments are fundamental to pricing just about every derivative out there.
Got it. TANSTAAFL. It was a shot in the dark, but I wondered if somehow a fund could double the divs of an index.