Investors should look to dividend exchange traded fund strategies as we see more volatile market conditions with uneven growth ahead.
“Those focused on dividend growth, particularly outside the traditional domestic large-cap space, have delivered strong performance in an otherwise challenging environment,” according to ProShares.
However, not all dividend strategies are created equal. Looking ahead, investors may take a look at mid- and small-cap dividend growth strategies that have shown strong potential. While mid- and small-cap stocks may exhibit greater volatility compared to large-cap names, a dividend growth strategy targets quality companies and may help diminish the swings.
“Higher-quality companies tend to have stronger balance sheets and a potentially greater ability to withstand stormy market environments,” according to ProShares. “Focusing on higher-quality companies may be a sensible strategy in current market conditions, since quality has tended to outperform in periods of heightened volatility.”
For instance, investors can consider the ProShares Russell 2000 Dividend Growers ETF (NYSEArca: SMDV) and ProShares S&P MidCap 400 Dividend Aristocrats ETF (NYSEArca: REGL) to gain exposure to a group quality, dividend-paying small- and mid-cap companies.
REGL tries to reflect the performance of the S&P MidCap 400 Dividend Aristocrats Index, which includes mid-sized companies that have increased dividends for at least 15 consecutive years and is equally weighted so performance is not top heavy. The ETF includes a hefty 24.8% tilt toward the financial sector, along with 20.0% in utilities and 17.8% industrials. REGL has a 2.15% 30-day SEC yield.
SMDV tracks the Russell 2000 Dividend Growth Index, which includes small-cap companies with at least 10 consecutive years of dividend growth and is equally weighted as well. The ETF leans towards utilities at 30.6% of the fund’s portfolio, along with financials 19.4% and industrials 19.1%. SMDV shows a 2.23% 30-day SEC yield.
The dividend growth strategy has helped the ETFs generate better risk-adjusted returns than the traditional small- and mid-cap benchmarks. Since its inception, SMDV has gained 2.21%, compared to the Russell 2000’s 12.3% decline, and traded at a better standard deviation or lower volatility. Additionally, REGL fell 3.3% since inception, compared to the S&P MidCap 400’s 9.2% pullback, and showed a lower volatility as well.
Max Chen contributed to this article.