A general trend of investors moving out of high valuation growth stocks and into dividend-paying value stocks continues within markets as advisors and investors position their portfolios for a rising rate environment. One fund to consider when looking for a value play is the KFA Small Cap Quality Dividend Index ETF (KSCD), which has taken in almost $3 million in net flows since the beginning of the year.
In low-rate environments like those that have characterized the last decade, growth stocks offer the potential for future profit based on the expectation of above-average growth. Investors typically buy into growth stocks at higher price-to-earnings multiples than other equities because of this future potential profit, and in low-rate environments are willing and able to wait for those gains to manifest.
Rising rate environments throw a proverbial wrench into the profit pipeline for growth stocks, though, as those future gains are suddenly much less certain and the current value is what matters most. Value stocks, on the other hand, offer the chance at solid companies providing reliable dividends day-to-day, but may not carry the flashy profit potential that growth stocks offer in favorable, low-rate environments.
The pivot to value in rising rate environments is expected as advisors seek reliable sources of income for their clients. While most stocks are down year-to-date, growth stocks have taken a much larger hit than value stocks, and value stocks are experiencing continued inflows.
KSCD Offers Smart Beta Value Exposure
For advisors looking for a value play, the KFA Small Cap Quality Dividend Index ETF (KSCD) offers value investing with an eye towards reliable growth. The fund is benchmarked to the Russell 2000 Dividend Select Equal Weight Index, which utilizes smart beta to invest in small-cap companies within the U.S.
The fund offers exposure to companies that have demonstrated steady dividend growth over the course of 10 years with no decrease in quarter-to-quarter dividends per share per the prospectus, and also have an established record of stable cash flow and a robust business model. These characteristics together demonstrate what the fund deems as “quality.”
KSCD utilizes a smart beta strategy that seeks to deliver alpha at a price point that is cost-effective for investors. The fund is positioned to potentially perform well in a down market environment, as strategies that focus on dividend growth can potentially offer improved performance in said environments.
As of the end of January, the fund had a 29.83% allocation into financials, 17.26% into utilities, 14.69% to industrials, 11.84% to materials, 9.37% to consumer staples, and several smaller segment allocations.
KSCD carries an expense ratio of 0.51%, and KFA Funds is a KraneShares company.
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