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Where Aristocracy And Dividends Meet

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Where Aristocracy And Dividends Meet

Dividend growth exchange traded funds are again proving to be sound investments this year. The ProShares S&P 500 Dividend Aristocrats ETF (CBOE: NOBL) is higher by nearly 17% year to date while proving less volatile than the S&P 500.

What Happened

There are plenty of dividend growth ETFs on the market, some of which have looser requirements than others. When it comes dividend increase expectations, NOBL is strict relative to competing funds. The ProShares ETF tracks the S&P 500 Dividend Aristocrats Index, which requires member firms to have boosted payouts for at least 25 straight years.

That requirement leads to a relatively small portfolio of 57 stocks, several of which joined NOBL, earlier this year, but the fund averts concentration risk by equal weighting its components, none of which exceed weights of 2%. Many NOBL components exceed the 25-year requirement.

“A quarter-century of uninterrupted dividend growth is no small feat,” said Morningstar in a recent note. “As of the index's January 2019 rebalance, it had just 57 constituents. This group had an average of 41-plus years of consecutive dividend growth. “

Why It's Important

Investors are increasingly warm to NOBL, as highlighted by year-to-date inflows of nearly $731 million, confirming that investors like the idea of a basket of steady dividend growers with a stringent requirement for admission.

“The quality of the fund's holdings has shone through in its performance. From its October 2013 inception, it has held up better than similarly quality-oriented dividend funds during market corrections,” adds Mornigstar.

Sector weights in NOBL are capped at 30%. The fund's largest sector exposures are consumer staples and industrials at 23.62% and 21.37%, respectively. The 25-year mandate keeps technology exposure low (less than 2%) and the bulk of NOBL's financial services holdings (almost 13% of the fund's weight) are insurance providers and diversified financial companies, not money center banks, many of which, despite recent dividend growth, don't have 25 consecutive years of increased payouts.

What's Next

The rub with NOBL is that given its reduced volatility, it may not fully participate in broader market upside when large caps rally.

“Downside protection has come at the expense of upside participation, and in a market that has been trending positively since the fund's inception, it's little surprise that it has lagged broad-based market-cap-weighted index funds focused on U.S. large caps,” according to Morningstar.

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