Some passively managed dividend-focused exchange traded funds top actively managed equivalents. The WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ: DGRW) is an example of one such fund.
DGRW includes companies with high long-term earnings-growth forecasts for the next three to five years and weights components based on the value of dividends they are expected to pay over the next year. The ETF tracks the WisdomTree U.S. Dividend Growth Index (WTDGI), which evaluates companies based on earnings quality, return on assets (ROA) and return on equity (ROE).
DGRW is not heavily weighted to the rate-sensitive sectors that are often prominent in many yield-based dividend funds.
“In our view, income-oriented strategies have underperformed due to their persistent under-weights to the technology sector,” said WisdomTree in a recent note. “Historically, tech has a short track record of paying dividends in comparatively small amounts. However, what may surprise people is that, on average, the largest income-focused money managers are currently yielding less than what an investor could get from broad market exposure alone.”
DGRW’s technology weight is 22.40%, one of the largest weights to that sector among U.S. dividend ETFs.
Quality Call for Economic Market Environment
Specifically, the quality factor tries to identify companies that exhibit persistent profitability and low leverage in every type of economic market environment.
Profitability measures the efficiency of a business in terms of how well it can produce a return on investment. Consequently, an observer would look at a company’s ROA to gauge profitability as it is calculated by dividing net income by total assets and measures how well a firm deploys its assets to generate earnings, so those with higher ROAs are considered more profitable.
“DGRW has a trailing 12-month yield of 2.22%, which surpasses both the average (and weighted average) of the 10 largest Equity U.S. Income Lipper funds and the S&P 500,” according to WisdomTree.
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Technology, industrial and consumer discretionary names combine for about 53% of DGRW’s weight, highlighting the fund’s cyclical tilt. The fund’s performance underscores the notion that dividend ETFs do not need to be heavily defensive to deliver for investors.
“We believe that by focusing more on fundamentally sound companies poised for dividend growth, and less on who pays the highest dividends, investors can strike the perfect balance between quality and growth in their overall equity income exposure,” according to WisdomTree.
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Tom Lydon’s clients own shares of DGRW.