As companies find it harder to grow earnings in a slowing economy, exchange traded fund investors should focus on high-quality names to ride out this low growth environment. A focus on quality can pay dividends for investors, literally.
Dividend ETF investors who are seeking stability, along with exposure to the growing U.S. markets, should look to quality instead of chasing after yields. For instance, the FlexShares Quality Dividend Index Fund (NYSEArca: QDF), FlexShares Quality Dividend Dynamic Index Fund (NYSEArca: QDYN) and the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF) are a group of smart-beta ETFs that focus on both quality and dividends.
SEE MORE: An Attractive, High-Quality Dividend ETF Strategy
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.
[related_stories]“The key is in the ETF’s focus on a company’s overall financial health as opposed to just strictly fundamental metrics like the payout ratio. The FlexShares approach looks at management efficiency, profitability and cash flow in order to create a proprietary dividend quality score. Non-dividend payers and companies in the lowest quintile get rejected immediately. The fund focuses on stocks in the highest quintiles while balancing dividend yields and putting diversification controls in place to fill out the portfolio,” according to ETF Daily News.
QDF features a heavy cyclical tilt, which can be a positive trait in advance of higher U.S. interest rates. The financial services, technology and consumer discretionary sectors combine for nearly half of the ETF’s weight. Conversely, QDF’s exposure to the rate-sensitive telecom and utilities sectors is relatively modest as is the fund’s allocations to the downtrodden energy and materials groups.
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“The result is a portfolio that at a high level doesn’t look all that dissimilar to the S&P 500 but is much cleaner on the inside. The Quality Dividend ETF is currently overweight financials, which could benefit from an impending Fed rate hike, and utilities, an area of the market traditionally more conservative while delivering above average yields. It’s underweight primarily in the healthcare and technology sectors,” adds ETF Daily News.
FlexShares Quality Dividend Index Fund
