The dividend ETF space continues to be a favorite among investors as evidenced by the incredible level of interest seen in many of the products in the space. In fact, many issuers have lined up with several new funds focused on income strategies in order to tap into this sentiment.
This trend continues with First Trust as the company has just launched a new fund focused on the high-yield dividend space – The First Trust RBA Quality Income ETF (QINC). Below, we have highlighted the fund in greater detail (read: First Trust Launches 3 Innovative Income ETFs).
QINC in Focus
The newly launched ETF seeks to track the performance of Richard Bernstein Advisors Quality Income Index, giving investors exposure to income producing equity securities. The index uses a special screening method to select stocks that pay an attractive dividend.
However, while selecting the stocks, the index carefully attempts to control the risks associated with investing in higher-yielding stocks. The benchmark uses several layers of risk control to minimize the probability of dividend cuts and the related underperformance.
This strategy keeps the total fund holdings to just 52. The individual stocks are quite well diversified as no single security forms more than 2.3% of the total fund assets. Helmerich & Payne, Inc. (2.29%), Sovran Self Storage, Inc. (2.22%) and Reynolds American Inc. (2.21%) are the top three holdings of the fund.
However, sector-wise, the fund is heavily concentrated in Financials (41%) and Utilities (23.73%), which together comprise more than 60% of the total fund assets. The fund charges 70 basis points as fees to investors.
How could it fit in a portfolio?
The ETF could be well suited for income oriented investors seeking higher longer-term returns with low risk. The current period of low interest rates makes this dividend paying ETF quite attractive. Investors should note that high dividend paying stocks play a defensive role in a portfolio and helps to reduce overall volatility in uncertain times.
Dividends have accounted for more than 40% of total returns from the market over a long time horizon. Further, dividend payments are expected to continue to increase in 2014 as well as 2015, as most large U.S. companies continue to hold a record amount of cash and are in a position to increase payouts to shareholders.
Though the dividend ETF space has quite a number of funds targeting this segment, Vanguard High Dividend Yield Index Fund (VYM) and iShares High Dividend Equity Fund (HDV) are some of the nearest rivals of this newly launched fund (read: 3 ETFs You Can Love Forever).
Both HDV and VYM seek to give exposure to companies that pay a relatively high dividend yield on a consistent basis. While VYM manages an asset base of $7.5 billion, HDV has amassed $3.4 billion since inception. Also, both the funds are cheaper than the newly launched fund. HDV charges 40 basis points a year, while VYM charges 10 basis points as fees.
However, if we consider the broad dividend space, Vanguard Dividend Appreciation ETF (VIG) is the most prominent player in this space and has amassed $18.8 billion since its inception. The fund seeks to track the performance of stocks that have a history of increasing dividends over at least 10 consecutive years (read: Invest in Century-Old Companies with the New NYSE ETF).
Moreover, iShares Dow Jones Select Dividend Index Fund (DVY) and SPDR S&P Dividend ETF (SDY) are the other two well-known players in this space.
Given the intense competition in this space, it might be a little difficult for QINC to gather assets initially. Moreover, the fund is a slightly expensive option in the dividend space, considering the fact that all of the above mentioned funds charge 40 basis points (or even less) as fees.
However, QINC’s unique screening method of choosing high-yielding stocks (and thereby avoiding the “high-yield trap”) might attract yield-hungry investors to this product. The fund considers the fact that simply investing in high-yield equities is not enough.
Thus, the fund uses several layers of risk control while choosing stocks. This is what makes the fund stand out among the rest, and it could allow this ETF to compete with others, assuming it can offer up a lower risk play on the dividend world (read: Best ETF Strategies for 2014).
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