What is DFND? (Pros, Cons, and Strategies)

For investors seeking to balance risk and reward while maintaining a focus on dividend income, the Siren DIVCON Dividend Defender ETF (DFND) offers an intriguing option. Whether you're preparing for retirement or looking to diversify your portfolio with a defensive strategy, DFND might be the right fit. Let's explore what DFND is, its advantages and disadvantages, and some potential strategies for investment.

What is DFND?

DFND stands for Siren DIVCON Dividend Defender ETF. It is designed to provide investment returns that closely correspond to the performance of the Siren DIVCON Dividend Defender Index.

The unique aspect of DFND is its dual strategy focus. It not only selects companies with strong dividend potential but also involves taking short positions in companies with weak dividend growth prospects. This long-short strategy is aimed at providing a hedge against market downturns and protecting the core income-producing investments.

Key Features of DFND

• Focuses on high-quality, large-cap U.S. companies with strong dividend prospects.
• Combines long positions in companies likely to increase dividends and short positions in those likely to cut dividends.
• The strategy uses the proprietary DIVCON dividend health rating system to identify stocks.

The DIVCON system uses a variety of metrics, including dividend payout ratio, free cash flow, earnings growth, and return on equity, to evaluate the potential for dividend growth or cuts.

DFND Composition

DFND usually comprises two parts:

1. Long Positions: Investments in about 20-30 stocks expected to increase their dividends in the future, identified through the DIVCON rating.

2. Short Positions: Investments in approximately 15-20 stocks expected to reduce their dividends, thus hedging the portfolio risk.

The ETF primarily includes high-liquidity, large-cap companies which are deemed financially stable with good dividend growth prospects.

Pros of DFND

Defensive Strategy

DFND's defensive long-short strategy sets it apart from typical dividend ETFs. By holding long positions in companies likely to increase dividends and short positions in companies likely to decrease dividends, it builds a hedge against market volatility. This approach potentially cushions against downturns, offering more stability.

Attractive Risk-Adjusted Returns

The dual strategy tends to provide attractive risk-adjusted returns. While the long positions contribute to steady income and potential growth, the short positions mitigate risk during market corrections, preserving capital and income potential.

Dividend Focused

Even with a defensive strategy, DFND maintains a solid focus on dividends. The DIVCON system ensures the ETF includes companies with a strong dividend outlook, contributing to income-focused investment goals.

Cons of DFND

Complex Strategy

The long-short strategy of DFND, while defensive, also adds complexity. Investors need to understand that short positions can sometimes lead to losses if the market doesn't move as anticipated. Moreover, this complexity might come with higher management fees compared to simpler ETFs.

Potential for Lower Total Returns

While the strategy aims to reduce risk, it may also result in lower total returns in strong bullish markets. Investors seeking substantial capital appreciation might find DFND less appealing during market upswings when the short positions could underperform.

Higher Expense Ratio

The complexity of managing both long and short positions typically results in a higher expense ratio. Investors need to weigh whether the benefits of the defensive strategy justify the added cost.

DFND Investment Strategies

DFND's unique blend of dividend focus and defensive strategy makes it appealing for specific investment approaches. Let’s explore some potential strategies.

Income with Protection Strategy

For investors focused on income but concerned about volatility, DFND offers a balanced approach. By investing in DFND, you can achieve a reliable dividend income while hedging against potential market declines.

Long-term Defensive Strategy

DFND is suitable for long-term investors aiming to protect their portfolio from market fluctuations. The ETF’s focus on companies with strong dividend potentials and the added shorts on weaker companies provide a stability factor over long periods. This can be particularly beneficial for retirement savings, balancing growth and security.

Diversification Strategy

Using DFND as part of a diversified portfolio can enhance your overall risk-adjusted returns. By incorporating DFND alongside other investment instruments, you can spread out risk and gain exposure to companies with robust dividends while hedging against potential market downturns.

Maximizing Compound Growth

By continually reinvesting the dividends received from DFND and regularly adding to your investment, you can harness the power of compound growth. Over time, this strategy allows you to build up a substantial retirement nest egg or achieve long-term financial goals with a defense-oriented dividend focus.

Conclusion

DFND offers a unique blend of dividend investment and defensive market strategies, making it an appealing choice for investors looking for both income and protection. Its long-short strategy can provide stability and risk management, essential for long-term financial planning. However, the complexity and potential for lower total returns in bullish markets are factors to consider before investing. By understanding its advantages and drawbacks, and employing the right strategies, investors can effectively incorporate DFND into their portfolios.