There are scores of dividend exchange traded funds for advisors and investors to consider, and few are alike. However, there are some primary weighting methodologies found among such ETFs.
Those are weighting by yield, an emphasis on payout growth or a blend of the two. The WisdomTree US Quality Dividend Growth Fund (DGRW) fits in the second category, and that’s a positive for investors. For the three years ending December 11, the $10.8 billion ETF outperformed the S&P 500, the largest U.S.-listed dividend ETF and the Morningstar Dividend Yield Focus Index, confirming the WisdomTree ETF is a viable alternative basic core equity strategies fund.
DGRW has also shined bright relative to other such funds in the current environment of high interest rates. Since the start of 2022, the Federal Reserve hiked rates 11 times. While that hasn’t been a death knell for such ETFs over the past 24 months, DGRW topped the Morningstar Dividend Yield Focus Index during that period.
Why Dividend ETF DGRW Matters
DGRW breaks from the payout growth ETF pack by not focusing on dividend increase, but rather on companies’ return on assets and return on equity. These metrics can be harbingers of future dividend growth while steering investors away from payout cuts and suspensions.
“They are willing to accept lower current yields in exchange for higher future payouts and typically favor stocks with durable competitive advantages, long histories of dividend growth, and strong profitability,” according to Morningstar. “The stocks they invest in tend to trade at higher price multiples than those with higher dividend yields, reflecting their better outlooks but also raising the hurdle for future returns.”
By eschewing an emphasis on yield, DGRW can check some important boxes for investors. These include the potential for reduced volatility, the possibility of greater capital appreciation, and higher levels of diversification. After all, many of the highest-yielding stocks hail from a small number of slow growth, interest-rate-sensitive sectors. Those include real estate and utilities, groups that combine for just 1.49% of DGRW’s roster.
Plus, the ETF’s 31% weight to tech stocks, including a more than 15% combined allocation to Microsoft (MSFT) and Apple (AAPL), can help the fund keep pace with tech-led rallies. That’s something many dividend ETFs don’t do.
“They don’t always keep pace with the broader market during rallies. Dividend growth funds typically underperform the market during periods of exceptionally strong growth, when expensive stocks that pay little, if any, dividends fuel the market’s rise,” concluded Morningstar.
For more news, information, and analysis, visit the Modern Alpha Channel.
