Investors can get paid to wait. They can also be compensated for playing defense. Some exchange traded funds are avenues to both forms of compensation.
The FlexShares Quality Dividend Defensive Index Fund (QDEF) is one ETF that rewards patience and defensive postures. QDEF, which is nearly three years old, tries to reflect the performance of the Northern Trust Quality Dividend Defensive Index, which is comprised of U.S. dividend paying large-cap stocks and optimizes its holdings based on a so-called quality factor.
QDEF’s strategy applies a proprietary scoring model approach that determines a “quality factor” and an optimization process that seeks to maximize this factor, target a beta lower than the Parent Index (Northern Trust 1250) and improve on the Parent Index’s dividend yield, according to FlexShares.
QDEF is up just 1.4% this year, but the ETF deserves closer examination. Although QDEF is positioned as a defensive income option, the ETF’s name arguably belies its utility as a dividend growth potential.
Home to nearly 220 stocks, QDEF allocates over 35% of its combined weight to the financial services and technology sectors, two of the primary sources of S&P 500 dividend growth in recent years. Three of the ETF’s top 10 holdings are tech stocks, including a better than 3.5% weight to Apple (AAPL). That gives QDEF one of the largest weights to the iPhone maker among all dividend ETFs. [Different Ways to Dividend ETFs]
Proving that an ETF can deliver dividend growth potential without adhering to payout increase streaks as part of its weighting methodology, just of two QDEF’s top 10 holdings – Exxon Mobil (XOM) and PepsiCo (PEP) – are dividend aristocrats. However, three of QDEF’s top 10 holdings – Apple, Pfizer (PFE) and Microsoft (MSFT) – have some of the largest cash hoards in Corporate America, ensuring ample room for dividend growth. [Love These ETFs for Dividend Growth]
Defensive does not mean boring or excessive interest rate risk with QDEF. Consumer staples, utilities and telecom names combine for just 20% of the ETF’s weight. That does not mean investors make a significant yield as QDEF’s trailing 12-month yield of almost 2.5% is still slightly above the yield on 10-year Treasurys. Plus, QDEF’s beta is just 0.83.
Apparently, investors like QDEF’s story. When we highlighted the fund in September, it had $72.7 million in assets under management. That number has since swelled to $192.7 million.
FlexShares Quality Dividend Defensive Index Fund
Tom Lydon’s clients own shares of Apple and Microsoft.