DIVZ - DIVZ: Manager Inactivity Takes Toll On This 3% Yielding ETF

Summary

• DIVZ is an actively-managed dividend ETF focusing on a select group of low-volatile blue-chip stocks. The expense ratio is 0.65% and assets under management are up to $78 million.
• I initiated coverage on DIVZ in September 2022 and was excited for its potential. The fund's manager was well-reasoned in his selections and his views on portfolio management resonated.
• However, I've since been disappointed. I've seen surprisingly little trading activity that's cost shareholders significant gains, suggesting the manager is unwilling to take profits or adapt to new information.
• DIVZ has consistently underperformed the benchmark I assigned and is now one of the worst performers over the last two years. Investors should avoid DIVZ at this time.

Investment Thesis

The actively-managed TrueShares Low Volatility Equity ETF (DIVZ) has seen minimal activity over the last three months, unfortunately leading to flat returns while other high-dividend ETFs soared. The theme of today's article is the importance of adapting, and that's where DIVZ falters. High conviction is admirable, but so is taking profits on enormous gains on Energy stocks when appropriate. With a 0.80 five-year beta and an estimated 3.07% dividend yield, DIVZ succeeds in its two primary objectives. However, the portfolio is fundamentally weak on growth and earnings momentum, and I've decided to keep my rating on DIVZ to a hold.

DIVZ Overview

Strategy Discussion: High Conviction

DIVZ's strategy is proprietary, but through publicly-available interviews and information provided by TrueShares, I have learned the following:

• DIVZ's manager is Austin Graff, a CFA Charterholder
• Graff considers how securities interact when designing a portfolio
• The focus is on 25-35 large-cap companies that pay attractive dividends
• These companies also have high margins and high cash conversion
• Selections trade at low valuations with solid growth expectations
• DIVZ is a low-volatility fund that aims to protect capital during drawdowns

Graff only occasionally trades, as noted recently by Morningstar .

Graff underlined the advantage to long-term investors of his ability to take a much deeper look at each of the companies held by DIVZ. He also doesn't seek to make trades frequently. Holding shares of a company that continues to fund rapid dividend growth with increasing free cash flow can grow an attractive income stream.

It's an interesting feature for an actively-managed ETF. In two prior articles, I noted how DIVZ's early success was due to high exposure to the Energy sector. I questioned whether Graff would take profits, but that never happened. It's disappointing because Energy was the worst-performing S&P 500 sector over the last three months, declining by 5.93%, and it remains DIVZ's largest exposure. DIVZ also holds some of the worst performers shown in the table on the right, like Coterra Energy ( CTRA ) and Devon Energy ( DVN ). Not taking some of the enormous profits Energy stocks delivered last year was a missed opportunity.

Opal Capital is the sub-advisor to the fund, and DIVZ's fund page describes how high conviction is an essential tenet of their investment process. Furthermore, they're benchmark agnostic, a philosophy that prioritizes the manager's skills.

Our sole focus is to deliver distinct, stable income producing solutions for our clients. The main tenets of our investment process are a key source of differentiation: high conviction, deep fundamental research, forward looking analysis, and benchmark agnostic allocation.

DIVZ may not benchmark against an Index, but that doesn't mean ignoring the performance of other ETFs is acceptable. 63 U.S. dividend ETFs are trading today, and 25 others with a low-volatility focus. Investors have plenty of choices, so let's examine how DIVZ performed against some of these cheaper, more popular funds.

Performance: Missed Opportunities

In my initial coverage article , I discussed its impressive returns. However, most dividend funds with high Energy sector exposures did well. Examples include VYM, DHS, and the iShares Core High Dividend ETF ( HDV ), which have all outperformed DIVZ since its January 2021 launch.

At the time, I highlighted its annualized outperformance vs. the SPDR S&P 500 ETF ( SPY ), the iShares MSCI USA Min Vol Factor ETF ( USMV ), and the Schwab U.S. Dividend Equity ETF ( SCHD ). While DIVZ's gains still trounce SPY and USMV over this value-favored period, it's lost its lead over SCHD and now trails by an annualized 1.61%. SCHD only has about 5% Energy exposure, so the fact that it outperformed suggests its rules-based strategy is superior.

Finally, I compiled a short-term performance summary through January 2023 for 30 dividend and low-volatility ETFs. All funds have dividend yields above 2.50% with a large cap or total market focus, sorted by their two-year returns.

DIVZ was one of many high-dividend funds to perform well. The Invesco Dow Jones Industrial Average Dividend ETF ( DJD ) gained 23.19% over the last two years and has a low 0.07% expense ratio. The iShares Core High Dividend ETF ( HDV ) benefitted from high Energy sector exposure and outperformed by 4.02%. This table also highlights the lead given up over the last three months, as DIVZ's 1.13% return was the lowest.

Not taking some profits in the Energy sector was a significant error. DIVZ's high expense ratio is enough for some dividend investors to avoid it altogether. However, a leading track record would capture the dividend-investing community's attention and boost its AUM. Now, DIVZ's lookbacks are less favorable, and it will be challenging to convince investors why this largely-static portfolio will outperform passive and cheaper funds.

DIVZ Analysis

Sector Exposures and Top Ten Holdings

The following table lists DIVZ's sector exposures alongside the SPDR S&P 500 ETF ( SPY ) and the Vanguard High Dividend Yield ETF ( VYM ). When assessing expensive (0.65% expense ratio) actively-managed funds like DIVZ, I try to find a cheaper alternative that still delivers on the same key objectives: low volatility and high dividends. VYM does that, but with a more modest 10.71% exposure to Energy stocks.

VYM also has about 5% less exposure to Communication Services, with the difference made up in Financials. Previously, I found the WisdomTree U.S. High Dividend ETF ( DHS ) to be DIVZ's most suitable peer. However, its end-of-year reconstitution pushed its five-year beta up to 0.96, so it's no longer a fair, apples-to-apples comparison.

DIVZ's top ten holdings are listed below, totaling 39.40%. As described earlier, these are all blue-chip stocks led by Exxon Mobil ( XOM ), AT&T ( T ), and AbbVie ( ABBV ).

Fundamentals vs. VYM, DHS

The following table highlights selected fundamental metrics for DIVZ's top 25 holdings, totaling 89.87%. I also provided summary metrics for VYM and DHS; on the surface, DIVZ looks pretty good. Its gross dividend yield is 3.72% or 3.07% after fees. Constituents have raised dividends by 10.11% over the last five years, the portfolio's 9.62/10 Profitability Score is excellent, and the 0.80 five-year beta is low.

However, I have some concerns about the growth figures. While technically correct, they will materially change after this earnings season when Energy stocks like Coterra Energy and Devon Energy report. By assigning an 8% sales growth figure to these stocks, consistent with Exxon Mobil and Chevron, DIVZ's estimated sales growth falls from 7.61% to 5.20%. That's not enough to sustain the dividend growth and calls into question the claim of selecting companies with solid growth expectations.

DIVZ's 4.50/10 EPS Revision Score, derived from individual Seeking Alpha Factor Grades, is also concerning. It suggests analysts are indirectly bearish on the fund and that their low prices and high yields are warranted. DIVZ's score is the sixth-worst among the 30 ETFs listed earlier. Not surprisingly, ETFs with high Energy exposure also rank poorly, including DHS, FDL, and HDV.

Investment Recommendation

I don't support initiating a position in DIVZ. The portfolio needs more earnings momentum and is unlikely to deliver significant dividend growth. The 3.07% estimated dividend yield is decent but easy to find with other dividend ETFs. Finally, DIVZ's manager should have taken advantage of an opportunity to lock in significant gains in the Energy sector. This action would have solidified DIVZ as a leading dividend ETF over the last two years and convinced more investors to pay the 0.65% annual fee. Unfortunately, in this case, "high conviction" means "poor adaptability, " which I don't expect from an actively-managed fund.

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