New smart beta ETF for income investors: WisdomTree UK Equity Income UCITS ETF

A new smart beta ETF aimed at income investors has recently listed on the London Stock Exchange. The WisdomTree UK Equity Income UCITS ETF trades under the ticker WUKD and has an impressive historic yield of 5.9% with the dividends due to be distributed on a quarterly basis.

WUKD invests in the 33% of UK domiciled companies from the WisdomTree UK equity universe with the highest dividend yields. The weighting of the 103 stocks is based on the absolute amount of dividends paid by the companies subject to a 3% cap on each holding and a 25% sector cap.

This methodology ensures that the ETF has a large cap bias with over 83% of its index made up of stocks valued at more than £10bn and most of the rest being invested in the mid-caps. It uses full physical replication to generate the returns.

The largest holdings include the likes of British American Tobacco, National Grid, Imperial Tobacco, Scottish & Southern and GlaxoSmithKline, with the main sector exposure being the Financials.

Using the dividends to determine the weightings rather than the market value of the companies could result in a higher yield. The back testing also suggests that the high yielding stocks produce a far better return than the broader market index, although the fund currently has just £1.5m in assets under management.

There are two other smart beta ETFs operating in this area. The £785m iShares FTSE UK Dividend Plus (IUKD) offers exposure to the 50 highest yielding UK stocks in the FTSE 350 and is weighted according to the one year forecast dividend yield. It was launched in November 2005 and is yielding 5.2%.

The £128m S&P UK Dividend Aristocrats (UKDV) aims to strike a balance between the high yield and the sustainability and growth of the dividends. It has 30 underlying holdings and pays a dividend yield of 4.5%.

Despite the different methodologies IUKD and UKDV have both been highly correlated and are up between 20% and 30% since the latter was launched at the end of February 2012. This is well behind the 47% average return from the actively managed unit trusts and OEICs operating in the UK Equity Income sector.

It remains to be seen how the WisdomTree UK Equity Income UCITS ETF will perform compared to its actively and passively managed counterparts, although it is hard to find a better yield from an equivalent product.