HDV: A Game Changer

IndexUniverse.com

It's no secret that the current low-interest-rate environment and market volatility have investors searching for yield. As a result, high-yielding dividend ETFs have seen huge inflows in the past few months.

But when I looked at fund flows, one ETF really caught my attention—the iShares High Dividend Equity Fund (NYSEArca:HDV - News). In fact, it's now the fifth-largest U.S. dividend equity ETF, with over $500 million in assets under management.

While amassing over half a billion dollars since its inception in March is impressive, what's truly fascinating is HDV's inflows over the past few months. The following table shows fund flows for the five largest U.S. dividend ETFs, both in dollar and percentage of assets under management (AUM) terms.

 



July

August

September

Ticker

Total AUM ($M)

Flows ($M)

% of AUM

Flows ($M)

% of AUM

Flows ($M)

% of AUM

DVY

8,019

188

2.9

727

10

273

3.9

VIG

7,813

242

3.6

609

8.5

434

6.1

SDY

6,908

76

1.3

388

6.2

54

0.9

VYM

1,943

77

5.3

216

13.2

116

7

HDV

509

24

23.5

168

61

108

28.6

 

Looking at month-to-date flows through Oct. 25, HDV has already amassed more than $115 million, or roughly 23 percent of its AUM. While HDV's total inflows in dollar terms is certainly not the highest of the bunch, from a percentage-of-AUM perspective, it's blowing away its competitors.

So what's behind HDV's rising popularity?

There are probably several factors at play, but one has to do with the selection and weighting methodology of its underlying benchmark, the Morningstar Dividend Yield Focus Index. Many of the other large dividend funds screen out companies without a long history of dividend growth.

For example, the Vanguard Dividend Appreciation Fund (NYSEArca:VIG - News) requires companies to have at least 10 years of consistent dividend growth, while the SPDR S'P Dividend Fund (NYSEArca:SDY - News) requires at least 25 years of dividend growth history for inclusion. The iShares Dow Jones Select Dividend Index Fund (NYSEArca:DVY - News), meanwhile, requires five years of dividend growth.

According to a Morningstar white paper , while HDV's index also has a five-year dividend-paying requirement, it also places an emphasis on the financial health of companies and their ability to pay future dividends. According to HDV's marketing materials , this is why it includes such companies as AT'T, Verizon, Philip Morris and Intel that are excluded in funds like VIG, DVY and SDY.

That said, several of the dividend-focused ETFs on the market also include these companies, such as the Vanguard High Dividend Yield Fund (NYSEArca:VYM - News), WisdomTree Equity Income Fund (NYSEArca:DHS - News) and First Trust Value Line Dividend Fund (NYSEArca:FVD - News).

The main difference here is that VYM, DHS and FVD have a much broader scope. For example, VYM has 427 holdings, DHS has 332 holdings and FVD has 165 holdings. In comparison, HDV is heavily concentrated in its top holdings—in the aforementioned companies, for example—and has only 76 names.

HDV's geographic focus might also be a factor at play—it's a U.S.-based mega-cap fund that's yielding roughly 4 percent. And with all the uncertainty going on with the European debt crisis, investors are increasingly looking to invest in solid companies here in the United States to limit their exposure to European equities.

HDV is also heavily tilted toward defensive sectors. For example, HDV has a 43 percent weighting to companies in the health care and utilities sectors. The appeal here is that HDV's defensive tilt and yield can help cushion losses should the U.S. economy go back into a recession.

So far, HDV's performance against its competitors speaks for itself, with HDV being the only one out of the top five funds in positive territory over the past six months.

 

View photo

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HDV:6-Month Total Returns

Source:Bloomberg

 

So is HDV a game changer? So far, it looks to be the case. It's growing at a staggering rate, and quickly rising toward the top of the leader board.

Not only does HDV look to have staying power, but it now looks like it's getting ready to take on the big U.S.-dividend ETFs, including DVY, VIG, SDY and VYM.

 

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