Are Quality, Value & Dividend ETFs All The Same Thing?
The other day I stumbled across the Fidelity Dividend ETF For Rising Rates (FDRR). It is a smart beta fund that launched in October 2016 and has done well. It is not a high dividend fund, the yield reported on the fund’s home page is 2.61%, it is meant to weather a rising rate environment which can challenge dividend payers because as rates go up, those higher bond yields are relatively more attractive than the dividend paying equities.
Over the last year through November 30th the NAV is up 19.76% versus 22.87% for the S&P 500. I find that to be a remarkable
result as the only FANG stock it owns is Apple (AAPL). The style box on the fund page has it in the large/value square. For some context, in that same period growth as measured by IVW outperformed value as measured by IVE by almost 900 basis points. It does have some growthy dividend payers in there other than Apple, including Microsoft (MSFT) and Amgen (AMGN).
I could not find anything though that really describes how it builds the portfolio. The prospectus says;
The Fidelity Dividend Index for Rising Rates℠ is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends and have a positive correlation of returns to increasing 10-year U.S. Treasury yields.
I don’t doubt there is a smart beta methodology, they just don’t spell it out (but if you find it please leave a comment). While I do believe the performance has been strong, it hasn’t really been tested in terms of rising rates. When it first launched in October 2016 rates went up for a couple of months and it lagged IVE by a little bit. This year through Friday the yield on the ten-year Treasury Note is actually down about eight basis points. Arguably that is a sideways move in rates but definitely not a rising rate environment.
Logically, you might think there is a quality bias to FDRR and the chart backs that up, at least for a sideways rate environment.
FDRR might have a yield advantage over the quality ETFs though. iShares US Quality ETF (QUAL) yields 1.75%, the SPDRs US Quality ETF (QUS) yields 1.82% and the PowerShares S&P 500 Hi Quality ETF (SPHQ) yields 1.80%.
Above I said that FDRR’s performance has been very good but by the chart it has generally been good for all of the quality ETFs.
For someone who uses broad based ETFs, FDRR makes a good first impression but again, it has not been tested. If you want a factor fund that can beat the S&P 500 and it just so happens to involve dividends, there is no way to draw a conclusion. As a market proxy with a little more yield and a little less beta it looks like a useful hold. No strategy can always be the best performer but the attributes of a little more yield and a little less volatility will obviously be appealing to some.
Someone going for dividend growth might be better off using individual stocks. I am not a fan of dividend growth ETFs, as the dividends don’t necessarily grow. The SPDR Dividend Growth ETF’s (SDY) most recent regular dividend was $0.52. The first time a regular dividend was at least $0.50 was September 2007.