Is the Global X SuperDividend ETF a Buy?

The Global X SuperDividend ETF (NYSEMKT: SDIV) has a lofty trailing dividend yield of 10.7%. Given that the S&P 500 index (SNPINDEX: ^GSPC) has a tiny yield of around 1.3%, it's understandable that investors would be looking at the Global X SuperDividend ETF. But there's one problem here, and dividend investors will want to understand this massive negative before they buy this ultra high-yield exchange-traded fund.

What does the Global X SuperDividend ETF do?

The stated objective of the Global X SuperDividend ETF is to track the Solactive Global SuperDividend Index. This index is fairly simple. It buys the 100 highest-yielding dividend stocks in the world. There are market cap and trading liquidity restrictions, of course, but the approach is fairly straightforward and logical.

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Image source: Getty Images.

That said, there are some limitations on the dividend front. First off, the dividend yield has to fall between 6% and 20% when a stock is added to the exchange traded fund's (ETF's) portfolio. Six percent is a fairly high yield and 20% is massive. Secondly, the list of final candidates eliminates companies where a dividend cut has been announced. So there's a modest dividend risk screen in place. The holdings are equally weighted, as well, which helps to limit the damage that any single stock can do to the portfolio.

Still, the Global X SuperDividend ETF is a fairly aggressive income investment. And the huge yield is a sign of that. Before dividend investors jump in, thinking that the huge dividend yield makes up for any risks here, a closer look at historical performance is warranted.

What you give up is important with the Global X SuperDividend ETF

With a roughly 10% dividend yield, the Global X SuperDividend ETF is providing, with its yield alone, the normal return investors expect from the S&P 500 index. That suggests that the vast majority of the ETF's return over time will come in the form of dividends. That's not a bad thing if you are looking to maximize income, but when you look at the performance numbers there's more going on here than you might expect.

SDIV Total Return Price data by YCharts

As the chart above shows, the Global X SuperDividend ETF's total return has basically gone nowhere since its inception. Total return assumes the reinvestment of dividends, which an investor trying to live off of the income their portfolio generates probably wouldn't be doing. The chart below shows what has happened to the dividend and the share price since the ETF's creation. (The chart starts from when dividends started to get paid, so the total return is a little bit different from the above chart.)

SDIV data by YCharts

Notice that the stock price and the dividend have both fallen dramatically. If you bought Global X SuperDividend ETF and spent the dividends you would have been left with less income and less capital. That outcome is far from super.

Don't expect the dynamics here to change anytime soon

The thing is, the future isn't likely to be bright for this ETF. With less capital in the ETF to buy new stocks during the rebalancing period it will be very hard to increase the dividend over time. This ETF could be in something of a downward spiral even though it still has a huge yield. While a huge yield is the goal, it clearly hasn't turned into a winning investment for those who buy the Global X SuperDividend ETF.

The problem is really that the index's investment approach sounds great, but in reality it just doesn't produce a sustainable income stream. Most dividend investors will be better off passing on this ETF. A lower yield and growing dividend from an ETF like the Schwab US Dividend Equity ETF (NYSEMKT: SCHD) would probably be a better long-term choice.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.