Investors looking to bet on a value resurgence while being compensated for their patience can consider select dividend ETFs with value tilts, including the ALPS Sector Dividend Dogs ETF (SDOG).
SDOG tries to reflect the performance of the S-Network Sector Dividend Dogs Index, which applies the “Dogs of the Dow Theory” on a sector-by-sector basis using the S&P 500 with a focus on high dividend exposure. SDOG’s equal-weight methodology is important because it reduces sector-level risk and dependence of some groups that are considered to imperiled value ideas.
“After all, value can be found in all sectors and segments of the market, even in those that may not screen well on one individual metric such as P/BV,” according to BlackRock. “Rather, we would reiterate that the value factor, like all factors, typically exhibits cyclicality. While factors have tended to outperform over the long-run, in the short-run, they can have periods of underperformance based on the current phase of the economic cycle.”
This Dog Could Have Its Day
SDOG’s equal-weight methodology also means the fund allocates about 30% of its weight to the defensive consumer staples, healthcare, and utilities sector, a combination that can reduce volatility. Dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return.
The good news is SDOG isn’t a dedicated low volatility fund, which often carry rich earnings multiples due to overweight positions in defensive sectors. Historical data indicate value’s performances coming out of recession could enhance the allure of SDOG in the back half of 2020.
“Due to the capital-intensive nature of many value-oriented companies, this factor has tended to outperform during recovery periods and may lag during periods of economic slowdown when flexibility is key,” according to BlackRock. “As such, we would argue that recent underperformance of the value factor is not caused by a structural change, but instead can be explained by where we are in the economic cycle.”
Another positive is that SDOG isn’t a dedicated value fund – it has low volatility, quality, and size leanings – meaning that its potential upside isn’t entirely levered to value bouncing back.
“All historical return-enhancing factors — value, size, quality, and momentum — have experienced periods of out- and underperformance at different times. Therefore, much as investors diversify across stocks and bonds, they may want to consider having exposures across multiple factors, to balance the prolonged drawdowns of any one individual factor,” according to BlackRock.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.