US Equities

KVLE: Why is Microsoft the Largest Weighting?

The KraneShares Value Line® Dynamic Dividend Equity Index ETF (Ticker: KVLE) is designed to deliver high dividend income from higher quality and more conservative stocks. The single largest holding as of early March? Microsoft, a massive growth company that has a less than massive 0.72% dividend yield. The second and third largest holdings are Apple (0.56% yield) and NVIDIA (0.02% yield). Does this make sense? Absolutely.

Those three names make up about 15.5% of the KVLE portfolio. But they are also about 16.8% of the S&P 500. If you accept the S&P as the best proxy for the US equity markets as a whole (we do), then you understand that 15.5% of KVLE in these three stocks is pretty far from a full-throated endorsement of the names. Of course, they would not be in KVLE if we did not think they were attractive, but other stocks are, on balance, more attractive.

It is tempting to argue that since we believe Microsoft has a less rosy outlook than some alternatives, and it does not help our goal of a high dividend, KVLE should hold none of it. The problem is that Microsoft is more than 6.5% of the S&P 500. Not owning any of it would be a massive bet against it in terms of relative performance. Microsoft would be the single stock whose returns had the biggest impact on the relative performance of KVLE. And we would be rooting for it to underperform.

Of course, an investor might be unconcerned with relative performance. That is a rational approach but an increasingly uncommon one. Consider two possible rationales for investing in a dividend-oriented fund:

  1. An investor passionately believes in high dividends and desires a portfolio that is quite unlike the S&P 500 and heavily weighted in such industries as real estate, electric utilities, and tobacco.
  2. An investor desires exposure to the US equity market but wants more current income and less risk than an investment in, for example, SPY.

We believe that although more investors fall into Category 2, almost all dividend funds are designed for Category 1. If you buy an ETF that is simply a collection of high-yielding stocks, you will get the dividend you are chasing and a basket of risk exposures you likely do not want. You will get a large exposure to certain small and accident-prone industries. You will have a significant bet against the very largest companies and a bet on downtrodden companies whose stock has been declining.

KVLE uses the latest optimization software to balance the benefits of a higher-yielding portfolio of better-quality names with the cost of straying too far from the risk profile of the S&P 500 benchmark. KVLE is overweight the usual dividend industry suspects but not by as much as most dividend funds. It does not bet the farm against the so-called Magnificent Seven, Microsoft included. And it still has a high dividend yield.

For KVLE top 10 holdings, and other fund information, please click here.

Index Definitions:

S&P 500 Index: The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization. The index was launched on March 4, 1957.