Play Defense, Earn Some Income
Developing a defensive posture with equities can often lead, whether by incident or intent, exposure to dividend-paying equities. Plenty of exchange-traded funds lean defensive while focusing on quality dividend names, including the FlexShares Quality Dividend Defensive Index Fund (NYSE:QDEF).
QDEF follows the Northern Trust Quality Dividend Defensive Index, which “is designed to provide exposure to a high-quality income-oriented portfolio of long-only U.S. equity securities, with an emphasis on long-term capital growth and a targeted overall beta that is generally between 0.5 to 1.0 times that of the Northern Trust 1250 Index (Parent Index). Companies included in the index are selected based on expected dividend payment and fundamental factors such as profitability, solid management, and reliable cash flow,” according to FlexShares.
Year to date, QDEF's performance qualifies as decent though not spectacular. The dividend ETF is up nearly 6 percent, well behind the S&P 500, but QDEF has recently been hitting a series of all-time highs.
In Depth With QDEF
QDEF, which turns 4 years old later this year, has a trailing 12-month dividend yield of 2.66 percent, according to issuer data. That is well above the comparable yield on the S&P 500 and nearly 40 basis points higher than Wednesday's closing yield on 10-year U.S. Treasuries.
When it comes to dividend ETFs that purport to be defensive, investors may be apt to think many of these funds are heavy on consumer staples and utilities stocks. That is not necessarily the case with QDEF as the ETF's combined allocation to those low beta, high-yield sectors is just above 17 percent. That is two sectors combining for 17 percent of QDEF's weight while the ETF devotes 20 percent to the technology sector.
None of QDEF's 183 holdings command more than 3.3 percent of the ETF's weight and the fund's top 10 holdings combine for just 28.3 percent of its roster, a strategy that helps limit individual equity concentration risk.
Part of the reason QDEF is lagging the broader market this year is that the ETF is primarily a value fund and value stocks are trailing their growth and momentum rivals. Over half of QDEF's components are considered value stocks while (a perhaps generous) 13.6 percent are considered growth names.
While QDEF may not be setting the world on fire in terms of total returns this year, its long-term track record is solid. Over the past three years, QDEF has topped the largest U.S. dividend ETF by 130 basis points while displaying comparable volatility traits.
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