The dividend ETF space has managed to generate considerable interest among investors in recent months. Responding to investor demand, issuers have launched a raft of new funds while lining up quite a few more in an attempt to give a new spin to the age old dividend investing strategy.
First Trust, the Il-based leading global issuer of exchange-traded funds, is the newest entrant to the high-yield dividend ETF fray. The First Trust RBA Quality Income ETF (QINC) tracks the Richard Bernstein Advisors Quality Income Index, giving investors exposure to income producing stocks. The underlying equity index has been developed by Richard Bernstein Advisors, an independent advisory founded by former Merrill Lynch Chief Investment Strategist Richard Bernstein.
The index aims to maintain attractive current income while controlling risks associated with investing in higher-yielding equities. RBA believes high dividend-yield stocks should be viewed with caution as lower stock prices may simply reflect investor anticipation of impending dividend cuts or omissions. The risks associated with high-dividend stocks are simply higher since they may lead to selection of stocks whose dividends are either discontinued or reduced going forward.
To counter this problem, the index incorporates several layers of risk control to avoid future dividend cuts and subsequent underperformance. RBA screens companies for debt levels and stability of cash flow to ensure adequate coverage ratio, which in turn lowers the chance of potential dividend cutters getting included in the index.
Other portfolio optimization methods include considering companies with a minimum market capitalization of $200 million and a minimum daily trading volume of $1 million on an average.
The fund is fairly well diversified with 52 holdings and no individual stock contributes more than 2 percent of total weight on rebalancing dates. However, the fund has disproportionate exposure in financial (40.81 percent) and utility (24.08%) sectors, which is understandable since banks and other financial intermediaries are expected to improve their profit margins as interest rates firm up going forward.
All the remaining sectors including healthcare, energy, consumer staples, information technology, consumer discretionary, industrials and materials receive single digit allocations. The fund should be suitable for defensive investors since dividend-focused products tend to reduce overall portfolio volatility while protecting capital.
QINC has an annual expense ratio of 0.70 percent
Disclosure: No holdings
Contact Ulli