A Quality ETF For Dividend Investors

There is often an intersection of the quality factor and dividend stocks, a theme that can be tapped with exchange-traded funds such as the FlexShares Quality Dividend Index Fund QDF.

Quality And Dividends In QDF

QDF tracks the Northern Trust Quality Dividend Index, which goes beyond cap-weighting to select companies "based on expected dividend payment and fundamental factors such as profitability, solid management, and reliable cash flow," according to the issuer.

QDF, which is home to nearly $1.7 billion in assets under management and will turn five years old in December, has a trailing 12-month dividend yield of almost 3 percent. That is well above what investors will find on the S&P 500 or 10-year Treasuries. Importantly, QDF has established a track record of outpacing rival funds.

Strategy, Holdings And Allocations

QDF “strives to sidestep this risk by balancing profitability and yield. If a stock is more profitable, it should be able to maintain its dividend during a market downtown or raise its payout ratio in the future. Although this fund's profitability tilt helps it avoid the riskier, highest-yielding stocks, its yield has consistently topped the category average by 30 percent,” said Morningstar in a recent note.

Home to nearly 140 stocks, QDF devotes 19 percent of its weight to technology names and just over 13 percent to financial services stocks. The industrial and consumer staples sectors combine for 23.6 percent of the ETF's roster.

“Often, the quality metric is simply related to some measure of profitability. Many asset managers include quality in a multi-metric definition, for example, combining return on equity, debt-to-equity ratio and earnings variability,” noted FlexShares.

Essentially all QDF's holdings are large- and mid-cap stocks with about 57 percent being value stocks. Still, the ETF is not perfect.

“Drawbacks to this fund include its opaque process and short live track record,” said Morningstar. “Because this fund uses a proprietary quality scoring system and optimizes its holdings with narrow constraints, it's difficult to determine how the fund's holdings will shake out at each quarterly reconstitution. The fund has performed well since its inception in December 2012, but we'd like to see how it performs during a market downturn.”

QDF charges 0.37 percent per year, or $37 on a $10,000 investment. While there are less expensive dividend ETFs, QDF is significantly cheaper than the average actively managed equivalent.