Due to the facts that financials were dividend cutters during the financial crisis and the concept of tech dividends is still relatively new, ETFs that emphasize dividend increase streaks as part of their weighting methodology are often light on one or both of those sectors.
Perhaps not coincidentally, of the four largest U.S. dividend ETFs, VYM is by far the top performer this year with a 7.6% year-to-date gain. That ETF does not emphasize length of dividend increase streaks and features a combined 30% weight to financials and technology.
The FlexShares Quality Dividend Index Fund (NYSEArca: QDF), which is fast approaching its second anniversary, features a nearly 35% combined weight to the financial services and technology sectors.
Like many ETFs, QDF emphasizes the quality factor, of which a company’s ability to generate free cash and dividend growth and stability are integral tenants. QDF tries to reflect the performance of the Northern Trust Quality Dividend Index, which holds high-quality income-oriented U.S. companies with a targeted overall beta similar to the Northern Trust 1250 Index, or the parent index.
QDF’s quality emphasis implies a safer payout and more room for potential dividend growth. A recent study of U.S. dividend ETFs by Credit Suisse assessing the safety of the payouts of those funds’ underlying holdings found that QDF has one of the safest fixed coverage ratios.
Of QDF’s top-20 holdings, six are either technology or bank stocks. Apple (NasdaqGS: AAPL) and Wells Fargo (NYSE: WFC) are the ETF’s two largest holdings combining for over 9% of the fund’s weight. [A Dividend ETF Flex its Muscles]
Vanguard High Dividend Yield ETF
Tom Lydon’s clients own shares of DVY, IWM and Apple.