These ETFs aim to multiply the stock market’s dividends. How they work

Two new fund launches from Franklin Templeton aim to satisfy income-hungry investors who are looking for a new type of dividend fund. The money management firm debuted the Franklin U.S. Dividend Multiplier Index ETF (XUDV) and the Franklin International Dividend Multiplier Index ETF (XDIV) in late January. The funds are equity-only funds and don’t use leverage. Instead, the “multiplication” of dividends relative to the broader market is created through custom indexes, with different weighting and inclusion rules than some of the other leading funds in the category. “You’re seeing a greater departure from a simple rules-based portfolio, a simple index construction that’s, say, ranked by dividend yield, to an adoption of more sophisticated design or even active [portfolios], to deliver very precise outcomes,” said Todd Mathias, head of U.S. ETF product strategy at Franklin Templeton. The ETFs are too new to have official payout metrics, but the index for the U.S. fund touts a dividend yield of 4.13%, while the international index shows 7.43%. If the funds deliver those dividend yields, it will put them roughly equal to or above many of their largest competitors. The fees are also competitive, at 0.09% for the U.S. fund and 0.19% for the international fund. For comparison, the S & P 500’s dividend yield is about 1.2%. The higher yield may get investors more interested in the funds, but the approach to portfolio construction could be what determines its success. The custom indexes take stocks with above average dividend yields but then weights them to limit exposure to individual stocks and sectors. Real estate investment trusts are excluded. The indexes are designed to find the sweet spot on the “efficient frontier” for dividend yield and risk, Mathias said. “You look at how the stocks behave together as a total, versus just a collection of stocks that have higher yields,” he said. For example, according to VettaFi, the XUDV fund has more exposure to financials, technology and utilities than the Schwab U.S. Dividend ETF (SCHD) , which is the largest of the competitor funds. The FRanklin Templeton offering also has less exposure to energy and consumer companies than the iShares Core High Dividend ETF (HDV) , another popular fund in this category. The launches come at a time when traditional dividend funds have somewhat fallen out of favor. According to FactSet, four of the six largest high yield dividend funds have suffered outflows over the past year. The 10 largest funds in that category combined for less than one-fifth of the inflows of JPMorgan Premium Income ETF (JEPI) over the past year. JEPI uses derivatives to generate income, a strategy that has become increasingly popular with ETF investors over the past few years. The interest from fund issuers has also slowed. FactSet’s data shows only seven high yield dividend funds have launched since the start of 2024. That could work in Franklin Templeton’s favor, Mathias said. “We’re entering a space that hasn’t seen innovation to this degree in quite a while,” Mathias said.