A Dividend ETF That Has The Goods

The low volatility and value factors are trailing growth and momentum this year, but the situation could reverse in 2018. Investors can prepare for changes in factor trends with some dividend exchange traded funds, including those that employ a multifactor approach.

That includes the O'Shares FTSE U.S. Quality Dividend ETF OUSA. OUSA, which is over 2 1/2 years old, follows the FTSE USA Qual/Vol/Yield 5% Capped Factor Index. That benchmark provides access to U.S. dividend payers “that meet certain market capitalization, liquidity, high quality, low volatility and dividend yield thresholds, as determined by FTSE Russell,” according to O'Shares. “The high quality and low volatility requirements are designed to reduce exposure to high dividend equities that have experienced large price declines.” 

The quality factor is an essential ingredient in dividend investing, but not all dividend stocks are quality stocks. Dividend payers that also fit the bill as quality stocks usually have sound management and sturdy balance sheets that indicate commitment and ability to continue growing dividends over the long-term.

Why Consider OUSA Now

A common critique of some legacy dividend ETFs centers on the yield-weighting methodology they employ. It can make ETFs vulnerable as interest rates rise, which is expected to happen later this month and again next year.

Yield-weighted dividend ETFs usually feature heavy exposure to utilities stocks and other rate-sensitive sectors. Fortunately, OUSA is not considered a high-yield ETF. The fund's trailing 12-month dividend yield is just over 2 percent, which is not alarmingly high. That also implies room for dividend growth going forward.

Additionally, the high-yielding telecom and utilities sectors combine for just 11.7 percent of OUSA's weight and represent two of the fund's three smallest sector allocations. Year-to-date, OUSA has been noticeably less volatile than the S&P 500 and the largest yield-weighted dividend ETF.

For Skittish Investors

OUSA does make good on the low volatility promise and it is not just a 2017 theme. Over the past two years, the ETF's maximum drawdown is 450 basis points less than the S&P 500. That does not mean the ETF lacks cyclical exposure.

While consumer staples are the ETF's largest sector weight, OUSA allocates 29 percent of its combined weight to the higher beta consumer discretionary and industrial sectors, groups that often perform well as interest rates rise. Healthcare and technology, two of this year's best-performing sectors, combine for over a quarter of OUSA's weight.

Eight of OUSA's top 10 holdings have dividend increase streaks of at least 10 years and several of those companies have multidecade payout increase streaks. OUSA hit a record high on Tuesday.

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