The quality factor is in style this year and a primary avenue for accessing the factor is via dividend ETFs. Better still, is accessing quality via dividend ETFs that are explicitly dedicated to the factor, including the Global X S&P 500 Quality Dividend ETF (Cboe: QDIV).

The Global X S&P 500 Quality Dividend ETF tries to reflect the performance of the S&P 500 Quality High Dividend Index, which is comprised of the top S&P 500 companies that exhibit high quality and dividend yield characteristics and equally weighted. Each company’s quality score is derived from its return-on-equity, accruals ratio, and financial leverage ratio.

Dividends are often viewed as a quality trait, but investors looking for credible combinations of dividends and the quality should assess factors beyond pure yield. Those factors include return on equity (ROE) and a company’s ability to sustain and grow payouts.

“Focusing on quality and dividend yield, the S&P 500 Quality High Dividend Index has delivered significant outperformance over the long term relative to the broader market. In nearly 25 years of history, the strategy produced an annualized return of 13.26%, compared with 9.89% from the overall U.S. equity market as indicated by the S&P 500,” according to S&P Dow Jones Indices. “Taking volatility into consideration, the S&P 500 Quality High Dividend Index offered a risk-adjusted return of 0.94, which is 38% higher than that of the S&P 500.”

Why It’s Important

QDIV has been an admirable performer this year, returning more than 16%. The Global X fund has a trailing 12-month yield of 2.92%, or about 100 basis points more than the dividend yield on the S&P 500. Additionally, QDIV pays a monthly dividend, providing investors with a steadier stream of income.

“Besides the superior long-term returns, the S&P 500 Quality High Dividend Index has sustained a consistently higher dividend yield. On average, the strategy offered a 2.9% dividend yield compared with its benchmark’s 2% during the 15-year horizon,” according to S&P Dow Jones.

Related: QDIV ETF: Lean on Quality With Timely Dividend Payer 

QDIV holds 70 stocks and features a cyclical tilt as the technology, financial services, and consumer discretionary sectors combine for about 45% of the fund’s weight. Even with that cyclical bias, QDIV’s index often performs better than the broader market when volatility rises.

“The strategy topped its benchmark during all the turbulent periods and returned an average excess gain of 13.1%. The most noticeable performance occurred when the dotcom era ended on Sept. 1, 2002. While the S&P 500 tumbled more than 47% from its peak, the S&P 500 Quality High Dividend Index stayed in positive return territory and delivered 51.4% excess return over the benchmark,” according to S&P Dow Jones.

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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.