Quality Matters With Dividend ETFs

October 3rd at 1:54pm by Tom Lydon

Paltry U.S. interest rates have been a boon for dividend ETFs. Not only are payout funds one of this year’s top asset-gathering sub-segments of the ETF market, dividend funds are growing rapidly in terms of population. With more dividend ETFs coming to market, a focus on high quality fare is becoming increasingly important.

Investors that have focused on quality with their dividend ETFs rather than focusing solely on yield or dividend increase streaks, popular weighting methodologies for an array of dividend ETFs, have been reward this year. For example, the FlexShares Quality Dividend ETF (NYSEArca; QDF) has gained 20.4% since coming to market last December. [FlexShares Rolls Out New Dividend ETFs]

“Investor interest for high dividend stocks remains high and the reach for yield has expanded into a broader range of ETFs,” said Northern Trust Managing Director Shundrawn Thomas in an interview with ETF Trends at the Morningstar ETF Invest Conference in Chicago. “But picking up exposure to companies with attractive yields can mean exposure to some lower quality stocks.

While many dividend ETFs have found success by focusing on yield or dividend increase streaks, QDF and the FlexShares Quality Dividend Dynamic Index Fund (NYSEArca: QDYN) focus quality by employing several critical fundamental elements.

“It is the intersection of quality and yield,” Thomas said in reference to the FlexShares suite of U.S. dividend ETFs, which also includes the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF).

The FlexShares ETFs consider “profitability, cash flow generation and quality of management because bad management can undo a good company,” said Thomas.

QDF, QDEF and QDYN do not overtly eschew dividend increases, but the ETFs do offer ample exposure to recent sources of dividend growth. For example, QDF allocates more than 32% of its combined weight to financial services and technology names, the two leading sources of S&P 500 dividend growth over the past several years.

The FlexShares dividend ETF feature no “over concentration to certain sub-sectors” while offering “potentially better returns from sources of yield investors previously haven’t looked,” said Thomas.

The tactical approach works. QDEF and QDYN are up an average of 22.5% this year. QDEF has $39.2 million in assets under management while QDYN has $12.2 million.

ETF Trends editorial team contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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