Investors who still believe in the equity bull run but are wary of potential downturns can look to a quality dividend ETF strategy as a defensive play in a riskier stock market.

Specifically, investors can look to something like the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF) that focuses on quality dividend-paying stocks by measuring a company’s financial health. Furthermore, it provides a defensive tilt, targeting a beta that is lower than the market universe’s beta.

“FlexShares’ [Dividend Quality Score] process is designed to maximize quality and yield while putting several diversification controls into effect. The strategy strives to harness dividend quality and yield through its selection and weighting process,”

FlexShares’ multi-faceted dividend quality score examines companies based on three factors when determining its dividend quality indexing methodology.

“Measuring a company’s core financial health makes it possible to evaluate whether it may increase (or need to decrease) its future dividends. With this approach, the reliance on publicly available financial data means new dividend payers can be evaluated similarly to stocks that have paid dividends for decades. By using several lenses to evaluate financial health, an investor can gain a strong sense of how well-positioned a dividend-paying company is for success, and how protected future dividends are under current market and economic environments,” according to FlexShares.

Smart beta indexing methodology

The smart beta indexing methodology targets management efficiency or a quantitative evaluation of a firm’s deployment of capital and its financing decisions. By using a management efficiency screen, the index screens out firms that aggressively pursue capital expenditures and additional financing, which typically lose flexibility in both advantageous and challenging partitions of the market cycle.

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