Under The Hood: More Defense, More Dividends
Simply put, dividend funds are among the most popular ETF styles available to investors today. Inflow data proves the point. In a research note published by Morningstar earlier this month, the firm notes "total assets in the group are about $45 billion, up from just $8 billion three years ago."
Dividend ETFs have also "averaged about $800 million in monthly net inflows over the past three years," according to Morningstar. Oh, by the way, those statistics apply only to dividend ETFs focusing on U.S. equities. That is to say, when accounting for inflows to emerging markets dividend funds, the numbers are almost certainly higher.
Fueled by today's anemic interest rate environment, dividend ETFs are popular, but the market is not saturated. At least not in the eyes of ETF sponsors, which continue to bring new dividend ETFs to market.
Keeping with that theme, the FlexShares Quality Dividend Defensive Index Fund (NYSE: QDEF) made its trading debut today, December 19, 2012. "QDEF seeks to provide exposure to the long-term growth potential of U.S. securities while providing dividend payments. It is intended as a core stock market option that also helps investors try to meet their income needs," according to FlexShares, the ETF unit of Northern Trust (NASDAQ: NTRS).
Home to 177 U.S. stocks with a weighted average market capitalization of $86 billion, QDEF enters an arena fraught with competition. Major ETF issuers ranging from iShares to Vanguard and plenty of others offer comparable, blue chip-focused dividend ETFs.
However, it is important to note that not all dividend ETFs are created equal. Some use dividend increase streaks as the primary weighting methodology. Others focus more on yield while others screen for dividend growth potential.
To its credit, QDEF offers its own unique approach. The fund uses a proprietary scoring model and an optimization process. All of that is a fancy way of saying QDEF's primary goals include having a beta lower than its index (the Northern Trust 1250 Index) and better dividend yield than that index. As QDEF is a brand new ETF, yield information is currently not available. However, the low beta objective has been accomplished as the weighted average beta of QDEF's holdings is 0.88, according to FlexShares data.
Impressive is the fact that QDEF has a relatively low beta without excessive weights to some sectors known for being low-beta destinations. For example, utilities and telecom combine for barely more than 12 percent of the new ETF's weight. Conversely, financial services and technology, two higher beta sectors, combine for 35 percent of QDEF's weight.
Consumer staples is the third-larges sector weight at 12.6 percent followed by energy at 11.3 percent. Eight of the ETF's top-10 holdings are Dow components with Altria (NYSE: MO) and Accenture (NYSE: can) the exceptions. The top five holdings are Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), Pfizer (NYSE: PFE), Wal-Mart (NYSE: WMT) and Verizon (NYSE: VZ).
For now, the biggest hurdle facing QDEF is its status as a new ETF. For better or worse, many investors, even professionals, shy away from new ETFs for no other reason than that the funds are new. Along those lines, it pays to note some FlexShares ETFs have been prodigious asset gathers in short amounts of time.
The proof is in the pudding. The FlexShares Morningstar Emerging Market Factor Tilt Index ETF (NYSE: TLTE) debuted in September and has over $36.6 million in AUM. The FlexShares Morningstar Developed Markets ex-US Factor Tilt Index ETF (NYSE: TLTD), which debuted on the same day as TLTE, has over $31 million in AUM.
Obviously, there are no guarantees QDEF will repeat that success, but the fund's composition indicates this is one new ETF conservative investors could quickly embrace as a "shelter from the storm" play.
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