The quality factor is a point of emphasis for a growing number of strategic beta exchange traded funds. Though there has been debate surrounding defining quality as it pertains to factor-based investing, quality companies and dividend-paying stocks often go hand-in-hand because those dividends are seen as signs of stable earnings and thoughtful management.
The FlexShares Quality Dividend Index Fund (NYSEArca: QDF) is a prime example of an ETF that emphasizes both quality and dividends. 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. [Dividend ETF Asserts Itself]
QDF’s strategy is working. The ETF touched an all-time high last Friday, capping a two-year run that has seen QDF surge nearly 40%. That performance has topped the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) by about 800% basis points.
Ten-year Treasury yields inched lower Friday, but that decline did little to dent the benchmark yield’s recent surge. Entering Wednesday, 10-year yields had surged 28% in the past 10 days, the second-biggest 10-day rally for those yields over the past 45 years.
In predictable fashion, those rising yields have pressured an array of beloved rate-sensitive asset classes, including the utilities sector, real estate investment trusts (REITs) and exchange traded funds heavy on those groups. Fortunately, QDF is not one of the dividend ETFs that is overly sensitive to a possible Federal Reserve rate hike. Actually, the opposite is true. [Rising Rate Dividend ETFs]
Rate-sensitive telecom and utilities stocks combine for just over 8% of QDF’s weight while richly valued consumer staples names are the ETF’s fourth-smallest sector allocation. Light staples and utilities exposure does not mean investors sacrifice yield or dividend growth with QDF. The ETF helps investors steer clear of the mistake of picking a dividend ETF based simply on a stout yield. After all, some high dividend yields on some stocks could be signs of financial stress and a potentially strained payout.
The ETF’s trailing 12-month yield of 2.6% is well above 10-year Treasuries and QDF’s sector weights sure a clear line to dividend growth. Financial services and consumer discretionary, the only sectors expected to post double-digit dividend growth this year, combine for over 29% of QDF’s weight. [Solving for Quality]
Additionally, QDF features an almost 17.1% technology sector weight. Apple (NasdaqGS: AAPL), the most cash-rich company in the U.S., is the ETF’s largest holding at 4.4%.
QDF is also not constrained by market cap, giving investors exposure to dividend growth from more than just large-caps. Roughly 100 of the ETF’s 228 holdings are not large-caps, a group that includes 80 mid-caps.
FlexShares Quality Dividend Index Fund
