FVD - First Trust Value Line Dividend ETF: Some Attractive Features But A Sell For Now

Summary

• FVD invests in a basket of stocks run through a long-tenured Safety Ranking system developed by Value Line.
• The ETF is large, and liquid enough to merit consideration from many investors.
• FVD is spread out among several stock sizes, from Mega Cap to Small Cap.
• The ETF has had a strong relative return in 2022, but that's history to us.
• All things considered, we rate FVD a Sell.

Strategy

First Trust Value Line® Dividend ETF ( FVD ) is a US-focused dividend equity ETF. It aims to track Value Line Dividend Index. That index invests in stocks which are ranked in the top 2 categories (out of 5) based on Value Line's Safety Ranking System, which has existed for decades. The index also seeks such securities that offer above-average yields.

Proprietary ETF Grades

• Offense/Defense: Offense

• Segment: Thematic

• Sub-Segment: Dividend Yield

• Correlation (vs. S&P 500): Very High

• Expected Volatility (vs. S&P 500): Average

Holding Analysis

FVD's holdings allocation is fairly typical for an ETF which makes dividend yield a priority. Nearly half of the fund's assets are invested in companies classified as Mid Cap or Small Cap. So investors should not confuse this with an S&P 500-tracking ETF, given that the S&P 500 is predominantly weighted in Much larger stocks.

Strengths

The Value Line rating system has been a Wall Street standard for decades. And, while that company does not carry the prestige it did decades ago, the process is still sound when it comes to evaluating stocks at a high level, on a long-term basis. In addition, any ETF that screens for a well-documented safety criteria scores points with us.

Weaknesses

As the chart below indicates, FVD delivers quality dividends, but the dividend yield is not terribly high. That speaks to some natural constraints to the process, and investors have to determine if that tradeoff is what they want in a "dividend yield" ETF.

Opportunities

65% of FVD's allocation is divided among just 4 of the S&P 500's 11 sectors: Utilities, Industrials, Financials and Consumer Defensive, all of which tend to be decent providers of dividend yield. While that is not producing a very high yield for FVD currently, to the extent that these 4 sectors outperform the broad stock market, this ETF should benefit.

Threats

The converse is also the case when it comes to the current sector allocation. What is notably absent here is the Energy sector, where high yields are often found, but such businesses likely do not earn a high enough Safety Ranking from Value Line to make the cut. And technology is currently weighted at 9% of the ETF, which is much less than half that of the S&P 500.

In a market that has shown it can quickly become infatuated with either or both of those sectors at any time, FVD will not likely be able to keep up. That was not an issue in 2022, but some of FVD's largest sectors may be getting pricey. That allowed the ETF to do well in a rough broad market, but in a continued bear market, all sectors can be vulnerable.

Proprietary Technical Ratings

• Short-Term Rating (next 3 months): Sell

• Long-Term Rating (next 12 months): Hold

Conclusions

ETF Quality Opinion

FVD has a lot going for it, as far as an ETF that is capable of delivering a lower-volatility portfolio, with dividend stability at the core. At over $12 Billion in assets, and a solid ETF manager (First Trust) behind it, we have no significant hurdles in terms of the quality of FVD as a potential purchase. Liquidity is certainly not the highest we've seen in this category. However, it is important to note that when a fund only owns equity securities, and those securities are quite liquid themselves, that is the bigger factor to consider, as opposed to how many shares of the actual ETF trade on an average day.

ETF Investment Opinion

While FVD is one we would consider owning at some point. The current market climate is not that point. In fact, it may be nowhere near it. Dividend stocks, and stocks in general still appear overvalued to us, even after a rocky 2022 for the broad stock market. FVD held up remarkably well, especially when you consider that it did not have the typical ETF tailwind of strong energy stock performance earlier in 2022. That was what carried the day for so many equity ETFs. Our bottom line is this: FVD makes the watchlist. But it gets a Sell rating from us at this stage of the market cycle.

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