Bottom Line: Global ETFs are not always as well-rounded as their name might suggest.
89. Bond Futures + ETNs = No Distributions
Most investors establishing exposure to fixed income have at least a passing interest in deriving some measure of current returns; one of the most appealing features of fixed income is the steady return of capital through interest payments to bondholders. So it could come as a surprise that some bond ETPs are designed in a manner that will generally preclude them from making distributions-ever.
A number of ETFs offer exposure to bond market not by holding bonds directly, but by utilizing futures contracts linked to debt securities. There are a number of reasons for pursuing such a strategy, especially in markets where the individual bonds may not be very liquid. But there is a potentially discouraging side effect: the lack of interest payments and therefore the lack of distributions. The PowerShares DB Italian Treasury Bond Futures ETN (ITLY) is an example of an ETP that uses futures contracts to achieve its exposure. Investors drawn to this product by nice yields on Italian debt will be waiting a while for a check; ITLY is unlikely to ever make a distribution.
ETPs such as ITLY shouldn't necessarily be avoided, but it's important to understand the yield profile that results from the structural nuances.
Bottom Line: Bond ETNs feature quirks and nuance that should be taken into consideration prior to investment.
90. Details On Dividend Weighting
Dividend weighting has become a popular alternative methodology in recent years. It provides a way to simultaneously sidestep the issues associated with cap weighting while implementing a dividend-focused investment strategy. WisdomTree is the biggest issuer of dividend-weighted ETFs, products that track cash dividends paid to determine which companies are included in the underlying portfolios as well as the weight assigned to each. The result is an ETF that excludes companies that don't make distributions, and focuses in on those with the biggest payouts. There are a few nuances to dividend weighting that should be considered. First, this methodology might be a way to avoid companies that are "cooking the books" or legally manipulating earnings. Dividends can't be faked, so dividend weighting will tend to shift away from companies with a big delta between reported EPS and cash flow.
It should be noted that dividend-weighted ETFs won't necessarily deliver huge dividend yields, since allocations are determined based on cash dividends paid and not on the percentage of stock prices those distributions represent. There isn't necessarily a relationship between cash dividend paid and the effective yields; big dollar amounts can translate into relatively small yields, while smaller distributions from smaller companies can represent a much bigger percentage of equity value.
Finally, consider that dividend weighting might include some sector biases; certain types of stocks, such as utilities and telecoms, are generally known to make bigger distributions.