VSDA - REGL: Dividend Growth ETF Outperforming Its Benchmark

2023-11-13 14:32:39 ET

Summary

• ProShares S&P MidCap 400 Dividend Aristocrats ETF holds 46 stocks in the S&P Midcap 400 index with increasing dividends for at least 15 years.
• The REGL ETF has outperformed the mid-cap benchmark since inception, with lower risk and excellent dividend growth rate.
• It lags dividend growth ETFs tilted to larger companies due to outperformance of this size segment since 2019.

This article series aims at evaluating ETFs (exchange-traded funds) regarding the relative past performance of their strategies and metrics of their current portfolios. Reviews with updated data are posted when necessary.

REGL strategy and portfolio

ProShares S&P MidCap 400 Dividend Aristocrats ETF ( REGL ) has a portfolio of 46 stocks, a 12-month distribution yield of 2.42%, and a total expense ratio of 0.40%. Distributions are paid quarterly. It started investing operations on 2/03/2015 and tracks the S&P MidCap 400 Dividend Aristocrats Index.

As described by ProShares in the prospectus, eligible companies must be in the S&P Midcap 400 index and have increased dividend payments every year for at least 15 years. The index contains a minimum of 40 stocks, equally weighted with a limit of 30% for any sector. If fewer than 40 stocks pass the rules, companies with shorter dividend growth histories may be included. The index is reconstituted once a year and rebalanced quarterly.

The fund invests exclusively in U.S. companies, with 32% of asset value in mid-caps and 68% in small caps, per Fidelity classification. The heaviest sector is financials (27.9% of asset value), followed by utilities (22.2%), industrials (19.6%) and materials (13.4%). Other sectors are below 7% individually and about 17% in aggregate. Compared to the parent index and mid-cap benchmark S&P 400 ( IJH , MDY , IVOO , SPMD ), REGL massively overweights utilities, and to a lesser extent, also financials, materials and consumer staples. It underweights mostly consumer discretionary, healthcare, real estate, and ignores energy, communication and technology.

Positions are equal-weighted at every rebalancing, but they may drift with price action. The current top 10 holdings, listed below, represent 23.2% of assets. These are the constituents with the best momentum since the last rebalancing. The largest position weighs 2.41%, so risks related to individual companies are low.

Since its inception in February 2015, REGL has outperformed the mid-cap benchmark in return and risk-adjusted performance (Sharpe ratio in the next table). Nonetheless, it lags the large-cap index S&P 500 (SP500).

The sum of annual distributions has increased from $0.65 to $1.66 per share between 2015 and 2022. It is an increase of 155%, whereas the cumulative inflation has been about 25% at the same time, based on CPI. The annualized dividend growth rate on this period is 14.3%, which is excellent.

Comparing REGL with a dividend quality benchmark

In previous articles, I have shown how three factors may help cut the risk in a dividend portfolio: Return on Assets , Piotroski F-score , and Altman Z-score .

The next table compares REGL since inception with a subset of the S&P 500: stocks with a dividend yield above the average of their respective indexes, an above-average ROA, a good Altman Z-score, a good Piotroski F-score and a sustainable payout ratio. It is rebalanced annually to make it comparable with a passive index.

Past performance is not a guarantee of future returns. Data Source: Portfolio123.

REGL is 1% behind this dividend quality benchmark in annualized return. My core portfolio holds 14 stocks selected in this subset (more info at the end of this post).

Valuation and quality

REGL is slightly more expensive than its parent index in price-to-earnings and price-to-sales ratios, but it is cheaper in price-to-book and in price-to-cash-flow.

Data: Fidelity.

Among the 50 stocks held by the fund, 8 are risky regarding my metrics. In my portfolio reviews, risky stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate where these metrics are unreliable. Here, risky stocks weigh 17% of asset value, which is not a good point.

According to my calculation of aggregate metrics reported in the next table, quality is close to the benchmark.

REGL vs. competitors

The next chart compares characteristics of REGL and five U.S. dividend-growth equity ETFs:

• Vanguard Dividend Appreciation Index Fund ETF Shares ( VIG ).
• ProShares S&P 500 Dividend Aristocrats ETF ( NOBL ).
• iShares Core Dividend Growth ETF ( DGRO ).
• VictoryShares Dividend Accelerator ETF ( VSDA ).
• ProShares Russell 2000 Dividend Growers ETF ( SMDV ).

REGL has the highest expense ratio, tied with the small-cap fund SMDV. It is ranked 4th in size (assets under management) and liquidity (average daily dollar volume). It is in the middle of the pack regarding the current yield, but shows the best 4-year average yield. It is second to last in 5-year dividend growth rate, yet not far behind its peers.

Regarding 5-year and year-to-date performance, REGL beats the small-cap fund and lags behind its other competitors, which have a tilt to large-cap companies. REGL's underperformance is due to the stock universe, not to the strategy or management. Small and mid-cap indexes have underperformed the S&P 500 since 2019.

Takeaway

ProShares S&P MidCap 400 Dividend Aristocrats ETF is designed for investors looking for a dividend-growth fund outside the usual large-cap universe. It holds 46 stocks of the S&P Midcap 400 index with a history of increasing dividends for at least 15 years. It is overweight in financials, but its equal-weight methodology guarantees diversification across holdings. The fund is close to its parent index S&P Midcap 400 regarding valuation and quality metrics. It has outperformed the mid-cap benchmark since inception, shows a lower risk in drawdown and volatility, and its dividend growth rate is excellent. However, it has lagged dividend growth ETFs tilted to larger companies due to the outperformance of this size segment since 2019.

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