A Dividend ETF That Has The Goods
Todd Shriber, ETF Professor, Benzinga Staff Writer
December 6, 2017 1:49pm
The low volatility and value factors are trailing growth and momentum this year, but the situation could reverse in 2018. Investors can prepare for changes in factor trends with some dividend exchange traded funds, including those that employ a multifactor approach.
That includes the O’Shares FTSE U.S. Quality Dividend ETF. OUSA, which is over 2 1/2 years old, follows the FTSE USA Qual/Vol/Yield 5% Capped Factor Index. That benchmark provides access to U.S. dividend payers “that meet certain market capitalization, liquidity, high quality, low volatility and dividend yield thresholds, as determined by FTSE Russell,” according to O’Shares. “The high quality and low volatility requirements are designed to reduce exposure to high dividend equities that have experienced large price declines.”
The quality factor is an essential ingredient in dividend investing, but not all dividend stocks are quality stocks. Dividend payers that also fit the bill as quality stocks usually have sound management and sturdy balance sheets that indicate commitment and ability to continue growing dividends over the long-term.
Why Consider OUSA Now
A common critique of some legacy dividend ETFs centers on the yield-weighting methodology they employ. It can make ETFs vulnerable as interest rates rise, which is expected to happen later this month and again next year.
Yield-weighted dividend ETFs usually feature heavy exposure to utilities stocks and other rate-sensitive sectors. Fortunately, OUSA is not considered a high-yield ETF. The fund’s trailing 12-month dividend yield is just over 2 percent, which is not alarmingly high. That also implies room for dividend growth going forward.
Additionally, the high-yielding telecom and utilities sectors combine for just 11.7 percent of OUSA’s weight and represent two of the fund’s three smallest sector allocations. Year-to-date, OUSA has been noticeably less volatile than the S&P 500 and the largest yield-weighted dividend ETF.
For Skittish Investors
OUSA does make good on the low volatility promise and it is not just a 2017 theme. Over the past two years, the ETF’s maximum drawdown is 450 basis points less than the S&P 500. That does not mean the ETF lacks cyclical exposure.
While consumer staples are the ETF’s largest sector weight, OUSA allocates 29 percent of its combined weight to the higher beta consumer discretionary and industrial sectors, groups that often perform well as interest rates rise. Healthcare and technology, two of this year’s best-performing sectors, combine for over a quarter of OUSA’s weight.
Eight of OUSA’s top 10 holdings have dividend increase streaks of at least 10 years and several of those companies have multidecade payout increase streaks. OUSA hit a record high on Tuesday.
This article was written by Benzinga and not necessarily the opinions of O’Shares ETFs. For more information on O’Shares ETF OUSA, please visit its fund page: OUSA
Before you invest in O’Shares ETF Investments funds, please refer to the prospectus for important information about the investment objectives, risks, charges and expenses. To obtain a prospectus containing this and other important information, please visit www.oshares.com to view or download a prospectus online. Read the prospectus carefully before you invest. There are risks involved with investing including the possible loss of principal.
Concentration in a particular industry or sector will subject the Funds to loss due to adverse occurrences that may affect that industry or sector. The funds may use derivatives which may involve risks different from, or greater than, those associated with more traditional investments. The funds' emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend after the Fund's purchase of such a company's securities. Returns on investments in foreign securities could be more volatile than, or trail the returns on, investments in U.S. securities. Exposures to foreign securities entail special risks, including political, diplomatic, economic, foreign market and trading risks. In addition, unless perfectly hedged, the Fund’s investments in securities denominated in other currencies could decline due to changes in local currency relative to the value of the U.S. dollar, which may affect the Fund’s returns. The funds' hedging strategies may not be successful, and even if they are successful, the funds' exposure to foreign currency fluctuations is not expected to be fully hedged at all times. See the prospectus for specific risks regarding the Fund.
The securities of small capitalization companies are often more volatile and less liquid than the stocks of larger companies and may be more affected than other types of securities during market downturns. Compared to larger companies, small capitalization companies may have a shorter history of operations, and may have limited product lines, markets or financial resources.
Companies involved with the Internet, technology and e-commerce are exposed to risks associated with rapid advances in technology, obsolescence of current products and services, the finite life of patents and the constant threat of global competition and substitutes.
Past performance does not guarantee future results. Shares are bought and sold at market price (not NAV), are not individually redeemable, and owners of the Shares may acquire those Shares from the Funds and tender those shares for redemption to the Funds in Creation Unit aggregations only, consisting of 50,000 Shares. Brokerage commissions will reduce returns. Shares are not individually redeemable and can be redeemed only in Creation Units. The market price of shares can be at, below or above the NAV. Brokerage commissions will reduce returns. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 PM Eastern time (when NAV is normally determined), and do not represent the returns you would receive if you traded shares at other times.
O’Shares ETF Investments funds are distributed by Foreside Fund Services, LLC. Foreside Fund Services, LLC is not affiliated with O’Shares ETF Investments or any of its affiliates.