Last week’s ETF Talk introduced the concept of smart beta funds. A key reason a person might invest in a smart beta fund would be to use the fund’s formula to invest more heavily in quality equities that are underrepresented in a typical market-cap-weighted exchange-traded fund (ETF). One quality indicator in a stock is whether or not it issues a dividend, and there are a number of smart beta funds which focus on dividend-paying stocks, including FlexShares Quality Dividend ETF (QDF).
QDF seeks to replicate the results, before fees and expenses, of an index of high-quality dividend-paying equities. “High-quality” in this case is defined by fundamentals such as profitability, reliable cash flow and management performance. This fund is an income-oriented investment.
QDF has gained 6.40% in 2014, after recovering from market drops in February and August. Last year, the fund gained 33.27%. The yield is currently 2.69%. QDF typically makes an annual distribution.
QDF is currently well diversified, investing in the sectors of financial services, 14.76%; technology, 13.98%; consumer cyclical, 12.07%; energy, 11.52%; healthcare, 9.83%; consumer defensive, 9.21%; with smaller investments in industrials, utilities, basic materials and communication services. Its top 10 holdings make up 26.35% of the fund’s total assets. Holdings include Apple Inc., 3.72%; Wells Fargo & Company, 3.71%; Merck & Company, 3.25%; Pfizer, Inc., 3.23%; and Exxon Mobil Corporation, 2.69%.
Dividends are desirable as income, and they can serve as a signal of quality, since they indicate a company with the cash to spare to distribute to shareholders. However, since corporate executives realize that dividends are desirable, dividends also can be manipulated to mask a corporation’s underperformance. FlexShares Quality Dividend ETF (QDF) combines the attractive prospect of dividends with an additional quality screen to protect your investment.
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