2023-10-19 12:11:56 ET
Summary
- The iShare Core Dividend Growth ETF is poorly positioned in the current economic environment for multiple reasons.
- Inflation rates are likely to continue to rise, the current rate cycle we are in is likely to stay for some time.
- This article highlights the complex economic landscape and the additional complications caused by recent events.
Investment strategies have to change for the times. While long-term goals will remain the same, individuals will still have to adjust the equities and investments they target as the market environment changes, which equity and funds are best positioned for individuals' specific objectives.
Today, some of the more appealing and narrowly tailored investments for many individuals are exchange-traded funds. One well-known ETF that has attracted a significant number of investors is the iShares Core Dividend Growth Fund ( DGRO ). I last wrote about DGRO in January of this year, and I rated this fund a hold. I am now downgrading this exchanged traded fund to a sell. The fund still has minimal exposure to the energy and basic material sectors. The economy in the US and overseas has also continued to show signs of slowing, and this ETF remains overweight the financial and technology sectors. A rising dollar, which is more likely now with the recent international events, should create further headwinds for this growth fund as well.
DGRO has offered investors total returns of 144.31% since the ETF's inception in June of 2014. The S&P 500 ( SPY ) has offered investors returns of 124.52% during the same time frame.
Still, the S&P 500 has outperformed this fund significantly over the last year. The S&P 500 is up 17.93% since October of 2022, while DGRO's total returns during the same period are 10.60%.
The holdings of the iShares Core Dividend Growth Fund are 19.73% health care, 18.63% financials, 16.49% technology, 11.247% in the industrial sector, 10.15% in the consumer defensive sector, 7.01% in the energy sector, 6.63% utilities, 5.9% consumer cyclicals, 2.46% basic materials, and 1.52% in the communication sector. This ETF has a .08% expense ratio $22.91 billion dollars in assets under management, and a current yield of 2.58%.
DGRO has just 9.47% of the fund's holdings invested in the oil and basic material sectors, and this ETF also has significant exposure to the consumer defensive sectors, a sector that is hurt a lot by rising costs. DGRO is not well positioned for the current inflationary environment that is likely to remain for some time. Even though the fund does have some substantive exposure to the industrial sector, which tends to outperform when prices are rising, DGRO remains significantly underweight key sectors that tend to outperform during inflationary periods. The best gauge of inflation is the cost of energy, since this resource is priced into nearly all goods and services across the economy. The price of oil has been rising steadily over the last three months, which is a key reason why the previous trend of 12 consecutive months of lower rates of inflation has reversed
Basic materials are also some of the most important input costs that impact the rate of price increases as well. Since March of 2021, prices have risen dramatically, and some of the best-performing stocks in the overall market have been in these sectors. These areas of the market are very important sectors to target during periods like we are seeing now. The energy sector has also offered investors very consistent income and dividend growth over the last 3 years as well.
Even though the recent September jobs report was solid at first look, this data also showed that wage growth was the slowest since September of 2022, at .2%. The recent inflation data has shown that price increases are continuing to remain high as well, at 3.7%. The inflation level was unchanged from August, but this rate was still the highest the US economy has seen since May. The rate of price increases in the US economy had slowed for twelve straight months prior to July, but that trend reversed in August. These reports strongly suggest that the Fed is not likely to pause the current rate cycle in the near future, since Powell's stated target for the level of price increases is 2%.
DGRO also has significant exposure to the dollar because of the fund's overweight position in the financial and technology sectors, as well as the ETF's focus on large-cap stocks. With the current international turmoil and growing signs of an economic slowdown in the US and abroad, the recent trend of dollar strength that has been seen in the markets since August of this year should continue.
The dollar has risen consistently against the Euro and most major currencies since August. DGRO has nearly 40% of the fund's assets allocated to the financial and technology sectors, and the ETF's three largest holdings are Apple ( AAPL ), JPMorgan ( JPM ), and Microsoft ( MSFT ). Technology companies generate 58% of their revenues outside of the US, and the large-cap banks have significant international exposure as well. The S&P 500 has risen nearly 6.3% more over a six-month time frame when the dollar has fallen over the last 50 years, and most large-cap companies are more internationally diversified than in previous years.
DGRO has also offered minimal income even when the fund has performed well, and dividend investors will likely continue to be disappointed by the fund's payouts. Even though the fund has performed well over the last 3 years, this ETF has also still offered minimal income and dividends. The dividend growth rate of 8.97% is below average for an ETF focused on dividends. The current yield is below the rate of inflation.
While if price increase levels were to decelerate, or if the conflicts between Russia and Ukraine in the Middle East were resolved, the current rate cycle and upward trend of the dollar might reverse themselves, and this fund would become more appealing, that doesn't seem likely to happen right now though. The rising dollar and increasing rate of inflation that is preventing the Fed from being able to slow the current rate cycle are key factors to look at right now when analyzing DGRO. If the current rate cycle were paused, or if the international conflicts we are seeing right now were resolved, growth rates in the US and overseas might normalize, which would also make growth funds such as DGRO more appealing. These scenarios remain unlikely.
DGRO has outperformed the S&P 500 and most of the broader indexes for much of the last decade primarily because of the fund's exposure to large-cap tech, but this ETF is not well diversified or positioned in the current inflationary environment that should remain for some time. This ETF has also paid out only minimal income compared to more traditional dividend and income investments since the fund's inception in 2014. The economic environment is likely to remain for some time, and investors should be able to find more appealing investments in the market right now.
For further details see:
DGRO: This Fund Is Not Well-Positioned Right Now