Make A Quality Query With This Dividend ETF

Two of the most prominent themes in the world of exchange-traded funds this year are investors' favoring of the quality factor and the resurgence of dividends, a theme left for dead late last year as markets eagerly bet on multiple interest rate hikes from the Federal Reserve this year.

Obviously, the Fed has not gotten around to raising rates yet, and with each passing month, the chances of multiple rate hikes diminishes. That has been a boon for dividend ETFs. So have volatile markets and macro events, including but not limited to the state of China's economy, Brexit and the U.S. presidential election.

Volatility is benefiting the quality factor and the ETFs adhering to that factor, including the FlexShares Quality Dividend Defensive Index Fund (FlexShares Trust QDEF). After being one of a small number of ETFs to hit all-time highs last Friday, QDEF is up 8.1 percent year-to-date. The other number to consider is QDEF's trailing 12-month dividend yield of 2.88 percent, which is 151 basis points above last Friday's closing yield on 10-year Treasurys.

Related Link: Digging Deeper With ESG ETFs

The Index, Exposure

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.

QDEF aims to "target a beta lower than the Parent Index (Northern Trust 1250) and improve on the Parent Index's dividend yield," according to Flex Shares.

Due to its emphasis on companies that are prodigious generators of free cash, it is not surprising that QDEF devotes nearly a third of its combined weight to the technology and healthcare sectors as those two groups are home to some of the most cash-rich U.S. companies. Conversely, energy, a sector that has been cutting or suspending dividends for over a year, is less than 6 percent of QDEF's weight.

Why Consider QDEF

That does not mean the new ETF is not worthy of consideration in the current market environment. The opposite is true. QDEF's sector weights highlight why the fund could be profitable for investors if interest rates rise. QDEF's exposure to rate-sensitive telecom and utilities names is light, while the fund's financial services and cyclicals exposure is robust.

No holding accounts for more than 4.3 percent of QDEF’s weight. Top-10 holdings include eight Dow components as well as Wells Fargo & Co WFC and Altria Group Inc MO.

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