Index funds and ETFs often carry low fees and a slew of other advantages, but a fund that’s tied to an index can come with some drawbacks, including lack of immediate responsiveness to rapid shifts in market conditions.
That’s certainly been on display this year with various dividend ETFs, but the actively managed Principal Active Global Dividend Income ETF (CBOE: GDVD) isn’t married to an index.
GDVD will try to generate current income and long-term growth of income and capital by investing in dividend-paying equity securities. The advisors will utilize quantitative screens and research on an industry and company level to identify and monitor companies it believes have the commitment and capacity to pay dividends.
In a trying environment for dividend investors, including those embracing traditional index-based ETFs, GDVD can stand out due to its focus on quality.
“While historically falling bond yields has tended to be a boon for dividend ETFs, this time has been different as the prospect of dividend suspensions and cuts has called into question the security of the income stream,” said Goldman Sachs strategist Jessica Binder Graham in a recent note.
At a time when U.S. benchmarks are homes to growing numbers of dividend offenders with no relief found in many international indexes, GDVD’s focus on quality on dividend growth matters. After all, many of this year’s dividend cutters are companies with strained balance sheets and previously high yields that ultimately proved too rich.
The fund holds a small-, medium- and large-cap companies in both growth and value styles, along with real estate investment trusts or REITs. The fund will also hold international companies, with at least 40% of net assets in foreign and emerging market securities. GDVD will typically hold investments tied economically to at least three countries outside the U.S.
“About half of the largest dividend funds have removed companies that have suspended or cut dividends this year,” said Graham. “However, current holdings suggest that these funds still have holdings in these stocks suggesting the potential for further turnover in future months.”
To that point, typical indexes used by passive ETFs only balance two to four times a year, making it difficult for dividend funds to swiftly remove companies after they cut or eliminate payouts. That’s not a problem for GDVD. In fact, several of the fund’s top 10 holdings have boosted dividends this year.
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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.