While the long-term result definitely favors high quality, there are periods where junk is the way to go.
So what does this mean for our dividend ETFs?
This is the tricky part. We know that higher yield generally comes from lower quality.
Source: Yahoo! Finance, Newfound Research.
But we also know that the quality factor may fall in and out of favor.
For example, I mentioned above that FDL had 0 quality factor loading. Since the factor data for the analysis ended in November, FDL has returned more than any other of the 16 ETFs. It also has a yield of ~4%.
In addition to quality, other factors such as value and momentum may also be beneficial when selecting an ETF. Of the dividend ETFs that fall in the middle of the yield/quality pack (circled above), the SPDR S&P Dividend ETF (SDY) and First Trust Value Line Dividend ETF (FVD) have the highest value loading while SDY leads the group for momentum.
We wrote in our in 2016 Market Outlook (available on or website) that income may be a good source of total return in a low growth environment. Now that we are possibly in a ‘postponed rising rate environment’, investors will have to keep searching for yield opportunities. Lowering quality may be the only option for some investors. The question is, “How low?”
Corey Hoffstein is the Co-founder & CIO at Newfound Research, a participant in the ETF Strategist Channel.