Among the dividend-oriented exchange traded funds that trailing the broader market this year, there is the iShares Core High Dividend ETF (NYSEArca: HDV). HDV is up just 3.6% year-to-date, but this ETF offers rebound potential.
HDV has a 3.25% 12-month yield. The Core High Dividend ETF tracks the Morningstar Dividend Yield Focus Index, which follows 75 dividend payers screened for qualified dividend income, excluding real estate investment trusts and master limited partnerships. Additionally, the underlying index screens for companies with wide economic moats, or competitive advantages, low default rating and high-yields.
HDV’s underlying index “looks for businesses that possess at least some measure of an economic moat, the ability of a company to generate above average returns on capital over an extended period of time with limited disruption from competitors. Companies are then tested for balance sheet strength by looking at factors such as cash flows, asset/liability ratios and ROE to assess flexibility and the ability to sustain their dividends,” reports ETF Daily News.
Spotting reasons for HDV’s 2017 laggard status is easy. The ETF allocates almost 16% of its weight to the energy sector, the worst-performing group in the S&P 500. That is HDV’s second-largest sector allocation behind consumer staples and more than double the energy weight found in the S&P 500. HDV allocates almost 28% of its combined weight to healthcare and telecom stocks. Telecom is another lagging sector this year.
On the bright side, HDV charges just 0.08% per year, or $8 on a $10,000 investment, making it one of the least expensive dividend ETFs on the market.
“Expenses are the scourge of investment returns and low fees mean more money stays in your pockets. While, it took the fund a couple of years to gain its footing (it ranked in the bottom 10% of its Morningstar category in each of its first two years), it’s been a top quartile performer over the past three years. Even better, it has achieved those returns at about 15% less risk than the S&P 500. The S&P 500 has delivered better total returns but the Core High Dividend Yield ETF has provided superior risk-adjusted returns, as evidenced by its three-year alpha of 2.16%,” according to ETF Daily News.
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Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.
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