Well, that can be said of many dividend exchange traded funds because healthy payouts are one of the hallmarks of the quality factor, which has become increasingly popular with ETF issuers.
As of early August, there were 23 U.S.-focused quality ETFs on the market. Throw in the international offerings and the number approaches 40. Although most the quality ETFs have burst onto the seen in recent years with a spate of new launches this year, questions remain about how exactly the quality factor is defined. The quality factor “captures excess returns to stocks that are characterized by low debt, stable earnings growth and other ‘quality’ metrics,” according to MSCI. [Different Ways to Quality With ETFs]
An overlooked quality ETF that emphasizes dividends, though it is starting to shed that overlooked status, is the FlexShares Quality Dividend Dynamic Index Fund (NYSEArca: QDYN). QDYN debuted at the end of 2012 along with the well-known FlexShares Quality Dividend Index Fund (NYSEArca: QDF) and the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF).
Home to 226 stocks, QDYN’s holdings “are selected based on expected dividend payment and fundamental factors such as profitability, solid management, and reliable cash flow,” according to FlexShares. Those selection criteria put the fund firmly in quality ETF territory.
QDYN represents another valid option for income investors looking for insulation from rising rates as it has a mere 9% weight to utilities and telecom names. Although QDYN is light on those high-yielding sectors, it features a robust 3.15% weighted average dividend yield. Combine that with that fact QDYN does not adhere to the constraints of weighting by dividend increase streaks and some might assume the ETF lacks for dividend consistency and growth potential. [These Dividend ETFs are Soaring]
In reality, the opposite is true. Dependable dividend growth in QDYN comes by way of the ETF allocating over 30% of its combined weight to the energy, health care and industrial sectors. Important for the aggressive dividend growth investor is that QDYN devotes a combined 37.7% of its weight to the financial services and technology sectors.
Those sectors have been two of the biggest contributors to S&P 500 dividend growth in recent years. QDYN plays on that theme with two banks and two technology names among its top-10 holdings, including Apple (NasdaqGS: AAPL). [Check Your ETF’s Apple Exposure]
Investors are taking note of QDYN’s advantages. One ETF trading desk spotted unusual action in the ETF on Tuesday to the tune of $10 million in notional volume, which could be the sign of institutional buying. This year, QDYN has hauled in $53.5 million of its $78.8 million in assets under management.
QDYN deserves the accolades and more. As the chart below shows, since coming to market in December 2012, QDYN has dominated the Vanguard Dividend Appreciation (NYSEArca: VIG), the largest U.S. dividend ETF.
QDYN vs. VIG
Tom Lydon’s clients own shares of AAPL.