Quality Dividend ETFs Outperform | ETF Trends

Investors may be turning to the quality and value investment themes as dividend exchange traded funds lead the recent rebound.

For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) rose 5.0% Schwab US Dividend Equity ETF (NYSEArca: SCHD) gained 4.9% over the past month while the S&P 500 was 2.2% higher and the Nasdaq Composite was up 0.2%.

These two dividend-focused ETFs may be more appropriate for investors seeking exposure to quality names. VIG targets U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years and comes with a 2.39% 12-month yield. SCHD includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years, and it has a 3.04% 12-month yield.

Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts. Consequently, these quality dividend ETFs try to limit the impact of these value traps by requiring a history of sustainable dividend growth.

Alternatively, ETF investors may now choose from a number of multi-factor dividend ETFs that select components based on more than quality dividend payers.

For instance, the Elkhorn FTSE RAFI U.S. Equity Income ETF (BATS: ELKU) follows the performance of high yield U.S. stocks that have been screened for fundamental factors to target sustainable income. The underlying index screens for financial health based on the return on assets, cash flow to short-term debt plus interest expenses and net operating asset scaled by total assets. Additionally, fundamental weights include sales averaged over the prior five years, cash flow averaged over the prior five years, book value at the review date and dividend distribution averaged over the past five years. Over the past month, ELKU was up 4.7%.