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Dividend ETF Flexes its Muscles


With U.S. stocks racing to record highs on an almost daily basis, an assortment of dividend exchange traded funds are doing the same.

One of those ETFs is the FlexShares Quality Dividend Index Fund (QDF) . With almost $500 million in assets under management, QDF is the largest of three domestic dividend ETFs introduced by FlexShares in December 2012. That group also includes the FlexShares Quality Dividend Defensive Index Fund (QDEF) and the FlexShares Quality Dividend Dynamic Index Fund (QDYN) . [This Dividend ETF Deserves More Love]

Like many ETFs, QDF emphasizes the quality factor, of which a company’s ability to generate free cash and dividend growth and stability are integral tenants. QDF tries to reflect the performance of the Northern Trust Quality Dividend Index, which holds high-quality income-oriented U.S. companies with a targeted overall beta similar to the Northern Trust 1250 Index, or the parent index. [FlexShares Adds New Dividend ETFs]

QDF’s trailing 12-month yield of just over 2% is not eye-popping, but there is an advantage there. Obviously, QDF’s low yield is the result of low yields found on many of the ETF’s 2012 holdings. Only five of the ETF’s top-10 holdings yields over 3% and Altria (MO) that yields north of 4%.

The advantage is that a lower yield often implies a safer payout and more room for potential dividend growth. A recent study of U.S. dividend ETFs by Credit Suisse assessing the safety of the payouts of those funds’ underlying holdings found that QDF has one of the safest fixed coverage ratios.

QDF allocates just 9% of its combined weight to interest rate-sensitive telcom and utilities stocks. Financial services is the ETF’s largest sector weight at almost 20%, but a combined 24% goes to the technology and industrial sectors, two the best-performing sectors in rising rate environments. [Safe Dividend ETFs]

QDF, which hit an all-time high last Friday, is up almost 18% in the past year. Investors have become fans of the ETF this year, pouring $146.5 million into the ETF.

FlexShares Quality Dividend Index Fund