ETF Trends publisher Tom Lydon spoke with Simeon Hyman, Head of Investment Strategy at ProShares, at the Inside ETFs conference that ran Jan. 22-25, 2017. They talked about ProShares’ dividend growth strategies, notably its popular ProShares S&P 500 Aristocrats ETF (BATS: NOBL), which tracks the S&P 500 Dividend Aristocrats Index of companies that have consecutively raised dividends for at least 25 years.
Nevertheless, investors are not limited to large-cap dividend payers from the S&P 500.
“The dividend growth strategy works very effectively in mid- and small-cap stocks as well,” Hyman said.
Like, NOBL, REGL tracks a Dividend Aristocrats Index. The mid-cap Dividend Aristocrats Index, though, only requires 15 consecutive years of increased dividends for inclusion.
SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index. That index includes small-cap firms with dividend increase streaks of at least a decade.
REGL and SMDVs portfolios are constructed much like NOBL’s, with the companies that pass the dividend growth screen equally weighted subject to a maximum sector weight of 30%.
While smaller company stocks had lagged their larger counterparts coming out of the financial crisis, 2016 saw strong small-cap stock performance.
“They are coming back,” Hyman said. “Of course they should be part of an evergreen asset allocation, but in the near-term, folks are talking about Trump-onomics.
Looking at Trump’s potential effect on the U.S. economy, more are considering U.S. domestically-oriented smaller companies.
Investors are thinking about “how can I have some domestically focused small- and mid-cap stocks that can take advantage of, perhaps, reduced regulation, reduced taxes and fiscal stimulus,” Hyman said.
“The dividend growth strategy — REGL is our mid-cap, SMDV our small-cap — are great ways to take advantage of that because they identify these quality companies, and as an added kicker, they also don’t h ave some of the leverage you see in some of the smaller companies,” Hyman said. Both REGL and SMDV were ranked number 1 in their categories by Lipper in 2016.
Investors can also diversify into international markets while tracking similar dividend growth strategies. For instance, the ProShares MSCI EAFE Dividend Growers ETF (BATS: EFAD) tracks developed market Europe, Australasia and Far East companies that exhibit a minimum dividend increase streak of 10 years.
The ProShares MSCI Europe Dividend Growers ETF (BATS: EUDV) tracks the performance of the MSCI Europe Dividend Masters Index, which consists of at least 25 European companies that have consistently increased their dividends for at least 10 consecutive years.
The ProShares MSCI Emerging Markets Dividend Growers ETF (BATS: EMDV) follows the MSCI Emerging Markets Dividend Masters Index, which targets MSCI Emerging Market components that have increased dividend payments each year for at least seven consecutive years.
Additionally, as fixed-income investors face a rising rate environment, consider rate-hedged bond ETFs that mitigate rate risk with zero duration targets.
“We are leaders in a suite of bond funds that have built-in hedges to take them down to a target of zero duration, seeking to eliminate interest risk,” Hyman said. “They’ve done very well as rates have risen because they protected you from that, but they’re considerably more effective than say a short-duration product, which takes down your interest rate exposure and credit exposure at the same time. Since credit spreads typically narrow when interest rates rise, a strategy that mitigates interest rate exposure while preserving credit exposure can make a lot of sense.”
For example, the ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG) and ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG) hold short positions in Treasury futures to target zero duration. Duration is a measure of a bond fund’s sensitivity to changes in interest rates so a zero duration reflects no sensitivity to changes. Consequently, the zero-duration strategy should help an interest-rate-hedged ETF outperform its non-hedged fund options if rates continue to rise while providing investors with the attractive yields they have become accustomed to.