READ: What Makes That Ticker Tick: Edmondson and NDIVITR

On a recent episode of “What Makes That Ticker Tick,” VettaFi CMO Jon Fee caught up with Jane Edmondson, co-founder and CEO of EQM Indexes and the head of thematic strategy at VettaFi, to discuss the EQM Natural Resources Dividend Income Index (NDIVITR).

What Makes That Ticker Tick: Edmondson and NDIVITR

Jon Fee: Welcome to “What Makes That Ticker Tick,” I’m your host, and this is the show where we tackle questions about specific tickers. Today’s ticker is the EQM Natural Resources Dividend Income Index (NDIVITR). My guest today is none other than Jane Edmondson, head of thematic strategy here at VettaFi. Jane. How are you doing today?

Jane Edmondson: I’m doing great, John.

Jon Fee: Thanks for coming back on the show. I’m so excited to talk about this product. This ticker is a mouthful to say. But I love that we’re going to talk about topics like cash flow monsters, and Big Oil’s lack of investment, and then also you’re going to help me understand if we are in an early stage commodities supercycle.

So, Jane, my first question for you, is just as we get warmed up on this particular index and ticker. Tell me about the index’s use case. You know, what is the objective behind this index?

Jane Edmondson: Yeah I’m afraid that is kind of a mouthful. So I would describe the EQM Natural Resources Dividend Income Index (NDIVITR) as an example of what I would call an “income thematic.” So there are a few themes in play here. First of all, it’s a play on the energy transition. We know that old energy is going away and new energy materials are coming to the fore.

So you have exposure to both old energy and new energy materials, and the mix will change over time as it transitions. Another theme in the play, as you mentioned, is the commodity supercycle, and that favors commodity exposure in this heightened inflation environment. And then commodity exposure also provides some nice diversification benefits. It’s not as correlated with stocks and bonds when there’s no magnificent seven of natural resource dividend stocks like that.

So it’s typically under-owned by investors and it provides good diversification benefits. And it’s been a nice inflation hedge in the current environment. So if we go into the income aspects of this approach, you know, as John mentioned, there’s these energy materials stocks are really cash flow monsters. They are not heavily investing back into themselves, into new exploration.

It just doesn’t make sense because of the high-cost, high-risk environment. There are ESG headwinds. Everybody knows that fossil fuels are eventually transitioning to forms of energy. These companies are paying out cash to their shareholders in a few different ways. So if we look at the graphic, we have a chart that shows shareholder’s yield and you see fixed dividends.

So these companies are paying high fixed dividends that are generating generated by positive cash flows many of these companies are also raising their dividends. And then there’s variable and special dividends. Variable dividends have become increasingly popular with these companies because it gives them more flexibility on their company balance sheets. And they don’t have to dedicate themselves to a fixed dividend or commit to that.

And they have more flexibility. Share repurchases, we’ve seen a lot of that activity, especially coming into the end of the year. According to VettaFi research, there were about 2.7 billion in share buybacks just in the midstream space alone. So there is buyback activity. And then one of the trends that we’re seeing this year, this is kind of new is we’re starting to see some M&A.

So we had Pioneer Natural Resources. It was in the index that was applied by ExxonMobil. We had Hess which was acquired by Chevron. Both names were in our index portfolio. And I think we’ll probably see more consolidation down the line, not only in the energy space, but we’ll start to see it in materials as well because these businesses are scale businesses and they benefit from combining resources in this high-demand environment.

Jon Fee: Absolutely. So I definitely can see how these cash flow monsters and I love that, by the way, they create some pretty significant income catalysts within this portfolio. Jane, when you think about the HDR, is it a unique product in the marketplace or are there other products out there? Tell me how it’s different, you know. How would you distinguish it from other indices in the marketplace?

Jane Edmondson: Yeah. So there are a couple of other ETF indexes out there that do focus on natural resources, but we’re the only one that’s really focused on the income aspect of this. So that’s kind of the unique aspect of this index approach. We screen out companies that pay lower than a 3% dividend. But we wait for the companies to buy the indicated dividend yield to really amplify the income opportunities here.

As a result, we get a nice monthly dividend payout, which is currently around 7%. And then the other unique aspect is even though we’re in a global portfolio, we only have the US-traded names in the index. So that avoids foreign tax withholding in the ETF, which nobody likes to deal with.

Jon Fee: Very cool. I love this methodology and I can see how it’s coming together. Let’s move on to questions specifically about index construction. What is the starting universe for NDIVITR?

Jane Edmondson: Yeah. So again, we’re this is a passive rules-based index and so we generally, include companies, global companies that pay at least a 3% dividend. We don’t exclude companies that pay less frequently than quarterly. That’s important because a lot of companies that are non-U.S. pay semiannually or they’re paid annually and it’s kind of difficult to manage that.

So we do that with the index rules, and some of those payouts are pretty significant. So you definitely want to include those companies. Companies like Petrobras typically just pay at the end of the year. So we manage that with the rules and the index. And this all enables us to pay a nice, sustainable monthly dividend.

Jon Fee: Fantastic. And about how many companies are you applying these rules to within the starting universe?

Jane Edmondson: Yeah, so that’s the starting universe of names is probably down to hundreds. Currently, we have about 40 names in the portfolio. So it’s it’s more concentrated and again, that’s because we really only want to focus on those companies paying the best dividends in the space.

Jon Fee: Gotcha.

Jane Edmondson: Absolutely.

Jon Fee: How often is this particular index reconstituted or rebalanced?

Jane Edmondson: So we rebalance quarterly. And again, that’s important because most of the companies do pay quarterly and it is kind of tricky. You have to manage the rules like you would eat to sell a company right before they reported their actual before they paid their dividend. And so for those companies that pay less frequently, we tend to exclude those and just own them around the time of payment.

So we kind of, I guess, gain the system a little bit there from a timing standpoint. But again, this is all so we can support them with the highest monthly dividend that we can.

Jon Fee: Absolutely. It’s all about income in this particular index. Jane, we’ve covered index cases, we’ve covered index construction. I want to talk about performance measurement. How has this particular index performed year to date? And then maybe over a longer period of time, say, since inception?

Jane Edmondson: Yes, we’ve been in a more muted environment for energy, in commodity prices. You know, obviously, we had a big, big spike there because of inflation. But year to date, the index is up 11.9%. As I mentioned, it has been paying a current dividend of 7% since inception. I think the cumulative return is something around 22%. So it’s done really well in this high inflation environment, obviously worried about 4% core inflation right now.

So that 7% dividend is still a lot better and it is more than the inflation right now. And this tends to be kind of tied to inflation. So it’s somewhat inflation-proof in that sense.

Jon Fee: Very cool. Is there any other kind of market environment, you know, are should be aware of and how that might impact this particular index?

Jane Edmondson: Yeah, I mean, it is going to be tied to energy and commodities. But the nice thing is, you know, as those kind of go in and out of favor, as I mentioned, there’s diversification benefits there. It’s not correlated with other asset classes. And you know, the another nice aspect of this is that it does transition between energy materials over time and you’re getting paid along the way quite handsomely with those cash flows to have that kind of exposure.

Jon Fee: Absolutely. Which is important in this environment!

Yeah. Okay. So performance measurement sounds great year to date, not just the performance, but the dividend dividend yield. I want to move on to my favorite section of these discussions on what makes that tick or tick. And that’s really about what’s inside. It’s an index of say, 40 companies that you mentioned. It’s a pretty focused index. And those companies all have their own unique story, not just about how they got into this particular index, but what they do.

Can you talk about some of the constituents within the index?

Jane Edmondson: Sure. Sure. So as you mentioned, there are 40 names in the index. There are about 28 energy names in about 12 materials names. Currently, the weighting is about 70% to energy and 30% to materials. But that does change over time. And it’s going to be a function of the dividend weights and the cash flows, the transition over time, as well as some of the names in the index that you investors might recognize.

You’ve got, you know, the traditional integrated oils, things like ExxonMobil and Chevron. We’ve got Southern copper. Petrobras is one of the names in the index. So those are kind of more some of the more well-known names that investors might be familiar with.

Jon Fee: What about some of the lesser-known names within the portfolio or a particular holding that really excites you?

Jane Edmondson: Yeah, we’ve got plenty of those. One of the largest positions in the index is actually a company called Civitas. That’s about a 9% dividend. So that’s a nice one to have in there. And interestingly, they just acquired another company in the Permian Basin. So that’s interesting from the standpoint of that was an accretive acquisition.

I think that’s important here that a lot of these acquisitions, even if it doesn’t the cash doesn’t go directly to paying out shareholders. Accretive acquisitions result in higher dividends, too. So in that particular case, it was accretive from a cash flow standpoint and that’s how they’re able to pay that 9% dividend. And you know, I, in particular, do like the midstream names.

There’s another name in the portfolio. Hess Midstream pays an 8% dividend and you just raised their dividend. They announced a share repurchase. So that’s kind of really what the story is about. Right? It’s all about cash flows and paying those cash flows back to shareholders and either in the form of repurchases or directly in the form of dividends.

Jon Fee: Jane, not just cash flows, cash flow monsters. Thank you for coming back on the show today. Today, it was all about the ticker and divide PR, the EQM Natural Resources Dividend Income index. I think we said dividend like 100 times during this. That makes sense and I’m not surprised because that’s what this product is all about. Jane, thanks again for coming back on.

We’ll have you back on again soon. Thank you.

Jane Edmondson: Thanks, John.

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