Investors are buying companies that pay a dividend even if they rate poorly on conventional measures of quality. And U.S. stocks have generally been on an upswing since February, a tide that has been lifting all boats, by and large.
DFND's bets against Newmont Mining Corp, Freeport-McMoRan Inc and Exelon Corp have soured as the stocks rose instead.
Exelon, for instance, has spent more cash over the past year on core investments than it generated from business operations—even before paying dividends. But the electric utility saw its stock pop in February after promising to keep hiking dividends.
While DFND's average dividend-paying "long" stock is up 6.5 percent this year, its average "short" gained a punishing 44 percent, according to research service Morningstar Inc.
Rival Fund Sidestep Hazards
DFND's only "long-short" dividend ETF competitor, QuantShares Hedged Dividend Income Fund (DIVA), has managed to avoid similar hazards by shorting companies with low or inconsistent dividends.
The funds' differing approaches to determining what is a good short make for very different holdings. While DFND is long Citigroup, suggesting it predicts the bank could raise its dividend, DIVA is shorting the bank because the current dividend is relatively small.
DIVA also spreads bets across more stocks, smoothing out overall performance. The fund shorts about 200 companies, while DFND bets against nine. DIVA's average long position is up 18 percent, while its average short is up 14 percent, Morningstar data shows.
Among DIVA's top bets are that Nordstrom Inc., Targa Resources Corp. and Macy's Inc. could rise, while SBA Communications Corp., WPX Energy Inc. and Zayo Group Holdings Inc. could fall.
DFND is about $2.9 million in size, while DIVA invests $3.9 million in assets. Both ETFs have expense ratios slightly below 1 percent, which is above average in part because shorting stocks is typically more expensive than going long.