FDVV - FDVV: A Best Performing High Div ETF Thanks To Its Higher Beta And Sector Selection
2023-08-01 22:41:40 ET
Summary
- Dividend-paying stocks perform well in high inflation environments, with the Fidelity High Dividend ETF outperforming other high div ETFs.
- FDVV focuses on dividend yield and excludes stocks with high payout ratios, prioritizing companies with potential for dividend growth.
- FDVV's sector allocation strategy results in a higher beta and contributes to its outperformance compared to other high div ETFs.
Dividend paying stocks have a history of performing well when inflation is high and this is also the case in the current inflationary environment.
Figure 1: Total return chart (Author)
10 year US treasury yields peaked in October of last year at 4.25%. Since then yields fell back and Growth and Quality became the best performing equity factors.
Figure 2: Total return chart (Author)
Most high div ETFs are underperforming the S&P 500 with one exception: the Fidelity High Dividend ETF ( FDVV ). This outperformance can be explained by two factors: sector selection and FDVV’s higher beta compared to other high dividend ETFs.
Figure 3: Total return chart (Author)
Fidelity High Dividend ETF
The Fidelity High Dividend ETF seeks to “reflect the performance of stocks of large and midcap dividend-paying companies that are expected to continue to pay and grow their dividends”. This might lead us to conclude that FDVV is a dividend growth ETF, but this isn’t the case. The most important factor in the security selection is dividend yield.
Figure 4: Security selection (Fidelity)
FDVV excludes the 5% of stocks in the universe with the highest pay-out ratio. A lower pay-out ratio is preferable because such companies may be better able to sustain and possibly boost its payments in the future.
The highest-yielding stocks often tend to be either troubled companies or those with such a high pay-out ratio that they're unlikely to raise distributions.
Figure 5: Yield, risk and return (Fidelity)
So despite the focus on dividend yield, FDVV avoids the highest dividend paying stocks in a trade-off for a higher expected dividend growth.
Within each sector, each stock is weighted based on its market cap weight in the broader equity market plus an overweight adjustment. The overweight adjustment applied is equal for all constituents within that sector. The purpose of this “equal active” weighting approach is to reduce the potential for concentration in certain stocks based solely on market cap.
Figure 6: Top 10 Holdings (Fidelity)
The sector allocation is an important element in FDVV’s outperformance. In order to emphasize dividend-paying stocks, the sectors are weighted relative to the broader U.S. equity market depending on the yield characteristics of the sector.
Sectors with higher dividend yields are over-weighted, while those with lower dividend yields are under-weighted. Up to 40% weight is reallocated from the bottom half of sectors to the top half in terms of dividend yields.
As a result, FDVV has currently no allocation Materials and Utilities!
Figure 7: Sector allocation (Fidelity)
Compared to our favourite high div ETF , the iShares Core High Dividend ETF ( HDV ), has more exposure to the lower yielding sectors Technology and Consumer Discretionary and less exposure to the higher yielding sectors Utilities and Energy.
Figure 8: Sector drift (ETFresearch.com)
Figure 9: Dividend yield (ETFresearch.com)
The higher weight in Technology stocks did of course pay off, as did the lower weight in Utilities.
Figure 10: Total return chart (Author)
A setback of the higher exposure to the lower yielding sectors Technology and Consumer Discretionary and the lower exposure to the higher yielding sectors Utilities and Energy, is of course a lower dividend yield.
Figure 11: Dividend yield (Seeking Alpha)
FDVV has a dividend yield of 3.45%, while HDV has a dividend yield of 4.05%.
High div, low beta
Dividend payments may help to reduce the volatility of a stock's total return. The fact that a company pays a dividend means it is profitable and has excess free cash flow, qualities that may help to dampen volatility during challenging times and to offer downside risk protection.
High dividend stocks offer higher returns and at the same time indeed a lower volatility.
Figure 12: Higher returns with lower risk ( BlackRock )
And high dividend stocks offer indeed downside protection.
Figure 13: Downside protection ( BlackRock )
So high dividend investors are looking for both income and lower risk. HDV is providing both. The same cannot be said of FDVV. It’s dividend yield is below the yield on 10 year treasuries and it’s beta is almost one (calculated since the inception of FDVV in 2017). FDVV’s volatility and maximum drawdown is also higher than HDV’s.
Figure 14: Metrics (Portfolio Visualizer)
Both HDV and FDVV remain in a strong long term uptrend.
HDV deserves the label “high div, low beta” and FDVV doesn’t. It’s higher beta has on the other hand been beneficiary given the nice performance of the stock markets.
Conclusion
One of the key attractions of investing in dividend-paying stocks is that it tends to dampen volatility and provide some potential downside protection. For one thing, companies that generate enough free cash flow to pay dividend consistently tend to be stable businesses, and their stocks have historically tended to be less volatile than the overall market.
Income oriented investors are interested in both income and this lower risk offered by high dividend stocks. HDV is offering exactly this and the same cannot be said of FDVV. FDVV might be an interesting alternative for aggressive income oriented investors (an oxymoron?).
HDV remains our favourite high dividend ETF.
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FDVV: A Best Performing High Div ETF Thanks To Its Higher Beta And Sector Selection