Broadly speaking, dividend stocks and the related ETFs are disappointing investors this year. However, that’s not the end of the story.
First, a timeframe of barely more than seven months isn’t useful in measuring the efficacy of equity income. This is a long-term investing style. Second, the 2023 lethargy displayed by some dividend stocks reminds us that not all dividend ETFs are created equal.
Take the case of the WisdomTree U.S. Quality Dividend Growth Fund (DGRW). As measured by assets under management, DGRW is the eleventh-largest U.S.-listed dividend ETF. More importantly, the WisdomTree fund is beating its 10 larger rivals on a year-to-date basis. In many cases, the gap between DGRW and a competitor is significant.
One reason DGRW is outpacing rivals this year is because the ETF features a 29.36% weight to the technology sector. This is well above average in this category.
Why DGRW’s Tech Exposure Matters
DGRW’s tech allocation is meaningful because that sector is on a torrid pace this year, due in large part to the artificial intelligence (AI) boom. That’s something many dividend ETFs aren’t adequately levered to.
“The equity income section of the market has suffered from lack of exposure to artificial-intelligence-related businesses and too much exposure to underperforming banks, biopharma stocks, and the energy sector,” noted Dan Lefkovitz, a strategist for Morningstar Indexes.
It’s often overlooked in AI conversations, but Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Nvidia (NASDAQ: NVDA) are all dividend-payers. However, they’re not lynchpins in many traditional ETFs. That trio combine for about 16% of DGRW’s portfolio, with Microsoft and Apple ranking as the fund’s top two holdings by weight.
No, DGRW is not an AI ETF. That said, it clearly has exposure to relevant AI stocks and rosier dividend traits than dedicated AI ETFs. Additionally, DGRW is outperforming rivals with the help of what’s not found in the fund.
Energy and utilities stocks are among the primary detractors to performance by old guard payout ETFs this year, but those two sectors combine for barely more than 1% of the DGRW portfolio. Another point in DGRW’s favor is that while the fund sports a large weight to tech stocks, there are pockets of valuation opportunity in the ETF. Those include healthcare and financial services stocks, which combine for over a quarter of the DGRW roster.
“The good news is that a lot of dividend-rich areas of the market are attractively valued right now—financial services and healthcare among them,” concluded Lefkovitz.
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