2023-09-06 08:20:56 ET
Summary
- CDC holds 100 stocks selected for their high yield and low volatility characteristics. The ETF was a previous top-performer due to its substantial outperformance during the March 2020 market crash.
- Unfortunately, CDC lost its way last September, and what followed were disastrous results. Through August, CDC is the worst performer in 2023 among 85 dividend or low-volatility ETFs.
- Prior research also indicates its unique long/cash strategy only benefits investors approximately 50% of the time. The fully invested CDL has now caught up and surpassed CDC on total returns.
- Nevertheless, an ETF's fortunes can change quickly, both for the good and bad. That is why I'm taking a fresh look at CDC by evaluating its fundamentals alongside alternatives like SPHD, LVHD, and SCHD.
- Also included is a downloadable spreadsheet of the 85 above-mentioned ETFs and their YTD returns, the factors I look for with each of CDC's semi-annual reconstitutions, and my recommendation today.
Investment Thesis
It's incredible how fast an ETF's fortunes can change. Look no further than the VictoryShares US EQ Income Enhanced Volatility Weighted ETF ( CDC ) for evidence. I was the first Seeking Alpha analyst to cover CDC in June 2021 and again in February 2022 , recommending it as an excellent way for high-dividend investors to take some risk off the table while benefiting from its unique long/cash strategy. But doubt crept in throughout the year as I followed its semi-annual reconstitutions. CDC lost its low-beta advantage in September 2022 , which I proved was detrimental in my December 2022 review. Finally, I advised readers to pull the plug in March this year. It's a good thing, too, because CDC ranks dead last among 62 dividend ETFs through August 2023. Its 7.32% total return decline is also the worst among 24 low-volatility ETFs.
With such poor results, you might assume a potential value opportunity exists. Exploring that possibility is the purpose of this article. Below, I will look at CDC's diversification, growth potential, valuation, quality, and momentum and determine if the ETF is worth another shot. And, as always, I will provide the fundamentals for other ETFs I believe high-dividend investors should also consider. I hope you enjoy the read.
CDC Overview
CDC Strategy Discussion
CDC tracks the Nasdaq Victory US Large Cap High Dividend 100 Long/Cash Volatility Weighted Index. The Index is unique because, depending on its price relative to its all-time daily high value, it moves as much as 75% to U.S. Treasuries if prices decline to prevent catastrophic losses. That's the case today. CDC's top ten holdings list reveals a 75.39% exposure to cash and cash equivalents.
Notably, the approach worked in March 2020, when the SPDR S&P 500 ETF (SPY) declined by 12.46% compared to a 1.04% loss for CDC. The table below summarizes the strategy, which I describe in more detail in my earlier articles.
The March 2020 outperformance led to favorable three- and five-year lookbacks for CDC and possibly led some investors into a false sense of security. Indeed, when I tested the long/cash strategy over 20 years, I discovered it only benefitted investors 50% of the time. Also, the VictoryShares US Large Cap High Dividend Volatility Weighted ETF ( CDL ), which tracks the same underlying Index but has no long/cash rules, has finally caught up to CDC's gains since its July 2015 launch. The log graph below is helpful because you can easily see when the long/cash strategy worked (when CDC outperformed) and when it didn't. The approach worked in 2020 but has yet to work since.
As its Index name suggests, CDC aims to hold 100 low-volatile stocks that pay a high dividend. The selection process is as follows:
- The Index starts with the largest 500 U.S. equities (excluding REITs) and eliminates those without four consecutive profitable quarters.
- The highest-yielding 100 stocks are selected and then inversely weighted by volatility (180-day standard deviation of price returns).
- Sector exposures are limited to 25%, and reconstitutions occur semi-annually in March and September.
CDC Performance Analysis
The following table highlights CDC's performance against the Invesco S&P 500 High Dividend Low Volatility ETF ( SPHD ) and the Franklin U.S. Low Volatility High Dividend Index ETF ( LVHD ). I've set SPY as the main market benchmark.
CDC has delivered an annualized 9.43% gain compared to 6.86% and 8.24% for SPHD and LVHD. In addition, its standard deviation was the lowest at 13.48%, leading to remarkably better risk-adjusted returns (Sharpe Ratio). Still, most is attributed to 2020, when CDC outperformed SPHD and LVHD by 22.96% and 13.90%, respectively. I don't know how much weight investors want to place on such a once-in-a-lifetime event, but as you can see below, CDC's performance in other years isn't as impressive.
In fact, CDC is the worst-performing dividend or low-volatility ETF in 2023 among a peer group of 85. Interested readers can get the details by downloading this spreadsheet . It's also lagged SPHD and LVHD, two ETFs I'm not even fond of, most recently documented here and here .
CDC Analysis
CDC Dividends
Based on a solid "A-" Seeking Alpha Dividend Grade, CDC appears to succeed at delivering a high yield. Currently, it's 4.10%, and the ETF has grown dividends at 18.46% over the last three years, an incredible pace. However, the lookback period is favorable. Dividends were small in January, April, and May 2020, not representative of a fully invested index. Therefore, investors might find CDC's 9.38% five-year dividend rate a more reasonable measure.
To be sure, that growth is still impressive. However, other high-yield ETFs that are more established are competitive, which I've listed below. The list includes the Schwab U.S. Dividend Equity ETF ( SCHD ). SCHD is well-known for combining high yield and dividend growth. Also, SCHD and the Vanguard High Dividend Yield ETF ( VYM ) are the only dividend ETFs that have raised dividends for 10+ consecutive years.
CDC Sector Exposures
CDC substantially overweights the Utilities sector at 22.40%, which helps explain its poor performance this year. My latest review of the Vanguard Dividend Appreciation ETF ( VIG ) noted that the Utilities Select Sector SPDR ETF ( XLU ) is the worst-performing large-cap sector ETF in 2023. I discussed the sector in more detail here , explaining why I believe a turnaround is imminent. However, that applies to market-cap-weighted Utility ETFs. CDC is volatility-weighted after screening for high-yielding stocks, so its composition is different.
For the equity portion of its portfolio, CDC also overweights Financials at 18.75%. SPHD and LVHD also overweight Utilities, while SCHD has virtually no exposure to the sector. Instead, it's reasonably well-balanced across Financials, Health Care, Industrials, and Technology.
CDC Fundamentals
The following table highlights selected fundamental metrics for CDC's top 30 industries, totaling 90.60% of the portfolio. Please note that this analysis only applies when the Index is fully invested and mirrors CDL. I've also included summary metrics for SPHD, LVHD, and SCHD in the bottom rows.
A few observations:
1. There's a solid case that CDC is a stronger fund than SPHD. First, its 0.89 five-year beta is identical, and it offers higher earnings per share growth (2.94% vs. 1.92%). CDC also trades at just 15.57x forward earnings, almost one point less than SPHD. Its constituents have grown dividends by 7.48% per year over the last five years, and the fund appears better diversified. To demonstrate, SPHD holds only 50 stocks across 23 industries compared to 100 stocks across 42 industries for CDC. SPHD's key advantage is that its constituents yield 5.16%, or 4.86% after fees. Still, remember that a higher yield is a direct consequence of a more concentrated portfolio, so from this perspective, LVHD and SCHD are better apples-to-apples comparisons, since they both have 100 holdings.
2. The buy case for CDC is less clear when evaluating against LVHD. As mentioned in my thesis, CDC's underlying low-volatility feature disappeared last September and remains that way today. LVHD's 0.73 five-year beta is much lower and likely more appropriate for conservative investors, assuming CDC is fully invested. LVHD also has a higher 4.31% gross dividend (4.04% net) compared to CDC's 3.97% (3.62% net), so it hits the dividend and volatility factors better.
3. SCHD is a superior ETF trading at a slightly higher 17.30x forward earnings, but it's worth it. For instance, SCHD's constituents yield 3.66%, and after deducting its low 0.06% expense ratio, the net 3.60% yield is nearly identical to CDC's. In addition, its constituents have grown dividends by 10.82% over the last five years, 3.34% more than CDC's, and they have higher estimated sales and earnings growth rates that can support a growing dividend payment. Finally, we see the higher quality reflected in SCHD's 9.45/10 Profit Score, which I calculated based on individual Seeking Alpha Profitability Grades.
I also want to mention how CDC's 12 Electric Utilities selections have relatively poor earnings momentum. To demonstrate, consider the most recent sales surprise, earnings surprise, and EPS Revision Grade for each holding below.
- Southern Company ( SO ): -11.82% / 5.76% / D+
- Duke Energy ( DUK ): 8.53% / -7.61% / D
- Alliant Energy ( LNT ): -12.88% / 9.80% / C
- PPL Corp. ( PPL ): 43.80% / -8.81% / C
- FirstEnergy Corp. ( FE ): 4.07% / 3.61% / B+
- Exelon ( EXC ): 8.61% / 1.26% / B-
- Evergy ( EVRG ): -6.78% / 4.97% / C-
- Xcel Energy ( XEL ): -10.65% / -8.00% / D-
- Edison International ( EIX ): -7.37% / 6.61% / C-
- American Electric Power ( AEP ): -4.46% / -0.40% / C
- Entergy Corp. ( ETR ): -16.36% / 8.91% / C
- Eversource Energy ( ES ): -10.35% / 9.82% / B
These holdings are roughly equal-weighted, and the average sales and earnings surprise was -1.31% and 2.16%. The average EPS Revision Grade was below a "C," or 4.49 on an adjusted ten-point scale. In contrast, the slash line for the Vanguard Utilities ETF ( VPU ) is 0.53% / 4.58% / 5.85. These figures signify negative earnings momentum for CDC's top industry, meaning that a near-term turnaround is unlikely in my judgment.
Investment Recommendation
CDC doesn't stand out, so I've reiterated my "sell" recommendation on what was once an attractive ETF. SCHD is a superior fund regarding expenses, profitability, dividend growth, and total returns. In addition, SCHD's estimated 3.60% dividend yield and 0.91 five-year beta are almost identical to what CDC offers, so there's no good reason to select the latter. While there may be a value opportunity because it is the worst-performing dividend and low-volatility ETF in 2023, hoping for a turnaround "just because" is not an investment strategy. In short, I recommend you avoid CDC and re-evaluate once it stands out again on either dividend yield or low volatility. Thank you for reading, and I look forward to your comments below.
For further details see:
CDC's Catastrophic Collapse: Diving Into 2023's Worst Dividend ETF