Smart ETF Eyes Quality Dividends

09/24/2014 9:00 am EST

Focus: ETFs

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and

A key reason a person might invest in a smart beta fund would be to use the fund’s formula to invest more heavily in quality equities that are underrepresented in a typical market-cap-weighted way, explains Doug Fabian in Weekly ETF Report.

One quality indicator in a stock is whether or not it issues a dividend, and there are a number of smart beta funds which focus on dividend-paying stocks, including FlexShares Quality Dividend ETF (QDF).

QDF seeks to replicate the results, before fees and expenses, of an index of high quality dividend paying equities.

High quality in this case is defined by fundamentals such as profitability, reliable cash flow, and management performance. This fund is an income-oriented investment.

QDF has gained 6.40% in 2014, after recovering from market drops in February and August. Last year, the fund gained 33.27%. The yield is currently 2.69%. QDF typically makes an annual distribution.

QDF is currently well diversified, investing in the sectors of financial services, 14.76%; technology, 13.98%; consumer cyclical, 12.07%; energy, 11.52%; healthcare, 9.83%; consumer defensive, 9.21%; with smaller investments in industrials, utilities, basic materials, and communication services.

Its top ten holdings make up 26.35% of the fund’s total assets. Holdings include Apple, Wells Fargo, Merck, Pfizer, and Exxon Mobil.

Dividends are desirable as income, and they can serve as a signal of quality, since they indicate a company with the cash to spare to distribute to shareholders.

However, since corporate executives realize that dividends are desirable, dividends also can be manipulated to mask a corporation’s underperformance.

FlexShares Quality Dividend ETF combines the attractive prospect of dividends with an additional quality screen to protect your investment.

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