There’s often an intersection between value stocks and dividend-paying companies and it could be a notable one for investors in the current market environment. That point is fortified by the fact that, with strong contributions from domestic firms, global payouts hit another record in the fourth quarter of last year. Thanks to exchange traded funds, investors have a myriad of efficient options for accessing value dividend payers under a single umbrella. Enter the VanEck Morningstar Durable Dividend ETF (DURA).
DURA follows the Morningstar US Dividend Valuation Index – a relevant index choice because that benchmark is designed to provide exposure to high-dividend stocks trading at attractive multiples.
Those traits could be signs of fundamental sturdiness within the DURA portfolio, underscoring the ETF’s potential utility at a time when durability and fundamental strength are at a premium.
“In short, by holding ‘value stocks,’ an investor might be able to reduce the level of drawdowns in their portfolio, achieving a relative degree of durability because the most overpriced stocks may draw down at a greater rate than fairly priced or underpriced stocks,” noted Charles Schwab research.
Home to 73 stocks, DURA’s approach to value differs from some of the more traditional funds in this category. For example, the VanEck allocates just 8.57% of its weight to financial services stocks compared to a 19.60% weight to that sector in the S&P 500 Value Index.
Due to fears regarding the health of the global banking system, DURA’s below-average weight to financials is a plus in the current environment. Additionally, the fund taps into the theme of rising technology dividends as that sector accounts for 21.49% of the ETF’s weight. That’s about 450 basis points in excess of the tech allocation in the S&P 500 Value Index.
“When we refer to value investing, we mean we’re investing with an understanding of where a company’s stock is priced versus its intrinsic value. In the short run, investor overreaction to headlines, announcements, and trends can sometimes move stock prices away from a company’s intrinsic value,” added Schwab.
An important takeaway from the above statement is that it doesn’t imply ETFs offering value traits should be constrained at the sector level. For example, as DURA proves, all value funds don’t need to be heavily allocated to financial equities. Translation: Diversification coupled with value is compelling across many market climates.
“During periods of market turmoil, diversification has generally been regarded as one effective means to reduce portfolio risk. Adding a value approach to an investor’s strategy might even enhance the potential effects of diversification in terms of seeking durability and growth potential,” concluded Schwab.
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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.
