In November, I wrote about an up-and-coming high-dividend ETF that was a potential game-changer. At the time, HDV was a $500 million fund showing impressive monthly inflows.
Today HDV is a $2 billion fund, and it’s time to update its status from “game-changer” to “king” of U.S. dividend ETFs.
There are a number of reasons I love the iShares High Dividend Equity Fund (HDV).
Sure, the fund returned close to 25 percent over the past year, beating all its peers. But aside from its performance, HDV continues to look promising under various market scenarios.
First and foremost, HDV—which tracks the Morningstar Dividend Yield Focus Index—is heavily tilted toward solid mega-caps, which helps the fund weather extreme volatility well.
Here at IndexUniverse Analytics, we use the Dow Jones U.S. Select Dividend Index as the benchmark for our U.S. high-dividend yield segment, which includes heavyweights like the $10.9 billion iShares Dow Jones Select Dividend Index Fund (DVY), the $11.6 billion Vanguard Dividend Appreciation ETF (VIG) and the $9.3 billion SPDR S'P Dividend ETF (SDY).
When measuring volatility, HDV carries a beta of 0.76 against our neutral benchmark, the lowest in the segment. This implies lower volatility than its peers, yet HDV outperformed them all on the upside—which is pretty impressive.
Looking at sector tilts, almost 30 percent of HDV’s 75 holdings are weighted in big pharma, which stands to benefit from Obamacare, officially known as the Patient Protection and Affordable Care Act.
But aside from being heavy in big pharma cash cows like Pfizer, J'J and Merck, HDV is also heavy in utilities and telecoms.
Recently, I’m hearing more chatter about the craze for dividend ETFs being overplayed, and concerns about yields losing their attractiveness as the funds’ share prices increase.
While there’s some truth to that argument, yields in ETFs are also affected by fund flows, so investors shouldn’t be thrown off by HDV’s comparatively “lower” trailing 12-month yield of 2.88 percent.
Ironically, investors might actually see HDV’s yield rise, or normalize, more toward its indicated, or “current” yield of 3.58 percent, as flows into the fund start to normalize.
The reason HDV is sporting a lower trailing 12-month yield is because during a period of enormous inflows—which HDV has definitely had over the past year—as ETF shares get created, dividend payments from the underlying holdings need to be distributed to a slew of additional shares at quarter-end, creating a somewhat-dilutive effect.
While inflows are still strong with HDV, from the perspective of percent of total assets, they’ve settled down from last year. That means that the yield should start to move up closer to its indicated yield.
The following table details HDV’s fund flows in 2012.
While flows still look strong, monthly flows under 10 percent of assets pales in comparison to the inflows of 20-60 percent of AUM we were seeing last fall.
Financial markets are off to the races once again after the ECB bond-buying announcement on Thursday. I can already foresee articles talking about the end of the high-dividend craze as investors pile back into risk-on assets, especially if the Fed announces QE3 in the near future.
Still, the questions I ask myself are, How much of central bank stimulus’ has already been priced into the recent rally and, How much sooner will the markets anticipate the waning of this new round of stimulus, compared with previous interventions from central banks?
In other words, How long do we have this time around before volatility comes back?
The good news is that even if the ECB announcement becomes a game-changer and we don’t see volatility, being an equity fund, HDV should benefit.
Therefore, I think the case for dividend funds remains strong, and HDV looks to be one of the most solid plays out there for long-term investors.
The fund combines the beneficial effects of low volatility, along with a solid yield for volatile markets.
Its mega-cap tilt gives it stability, while its health care exposure gives it a defensive twist that will help the fund benefit from Obamacare.
In short, HDV is a solid, low-volatility, high-yielding mega-cap play with a health care twist.
What more can you ask for in today’s markets?
At the time this article was written, the author had a long position in HDV. Contact Dennis Hudachek at firstname.lastname@example.org.
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