2023-10-04 16:09:16 ET
Summary
- First Trust Value Line® Dividend Index Fund ETF holds dividend stocks with a good Value Line Safety Rank, in equal weight.
- FVD is quite concentrated in utilities and industrials.
- The Safety Rank screening slightly reduces drawdowns and volatility, but return and dividend growth metrics are underwhelming relative to peers.
This article series aims at evaluating ETFs (exchange-traded funds) regarding the relative past performance of their strategies and metrics of their current portfolios. As holdings and weights change over time, updated reviews are posted when necessary.
FVD strategy and portfolio
First Trust Value Line® Dividend Index Fund ETF ( FVD ) started investing operations on 08/19/2003 and tracks the Value Line Dividend Index. It has 166 holdings, a 12-month distribution yield of 2.42% and a total expense ratio of 0.65%. Distributions are paid quarterly.
To be eligible in the underlying index, companies must be listed in the U.S., have more than $ 1 billion in market capitalization, a higher dividend yield than the S&P 500 (SP500), and a Value Line Safety Rank of 1 or 2. Investment companies and limited partnerships are excluded from the universe. The index is rebalanced in equal weight on a monthly basis.
As described on Value Line website:
“ The Value Line Safety Rank measures the total risk of a stock relative to the approximately 1,700 other stocks. It is derived from a stock's Price Stability rank and from the Financial Strength rating of a company, both shown in the lower right hand corner of each page in Ratings & Reports. Safety ranks are also given on a scale from 1 (Safest) to 5 (Riskiest).”
FVD is mostly invested in U.S. companies (about 85% of asset value). The portfolio is balanced between large companies (about 46% of assets), and small / mid-caps (about 54%).
The top sectors are utilities (21.5%) and industrials (20.6%), followed by consumer staples (15.8%) and financials (11.5%). Other sectors are below 10%. Compared to the S&P 500 ( SPY ), FVD massively overweights utilities, industrials, consumer staples and materials. It ignores energy and underweights all other sectors, mostly technology, communication and consumer discretionary.
Sector breakdown (chart: author; data: First Trust and SSGA)
Positions are reset in equal weight every month, but they may drift with price action. The next table lists the top 10 holdings as of writing. These are the best performers since the last rebalancing. They represent 6.4% of asset value and no holding weights more than 0.7% of assets. The portfolio is well-diversified and risks related to individual companies are very low.
Ticker | Name | Weight% | EPS growth %TTM | P/E TTM | P/E fwd | Yield% |
Booz Allen Hamilton Holding Corp. | 0.67% | -41.89 | 51.95 | 22.71 | 1.64 | |
Pfizer Inc. | 0.65% | -26.50 | 9.03 | 10.29 | 4.84 | |
Watsco, Inc. | 0.65% | 9.66 | 25.38 | 26.47 | 2.65 | |
A. O. Smith Corp. | 0.64% | -45.13 | 36.62 | 18.18 | 1.84 | |
MSC Industrial Direct Co., Inc. | 0.64% | 19.07 | 15.08 | 15.38 | 3.27 | |
Northrop Grumman Corp. | 0.64% | -15.64 | 14.39 | 19.13 | 1.72 | |
Automatic Data Processing, Inc. | 0.63% | 17.19 | 29.29 | 26.32 | 2.08 | |
C.H. Robinson Worldwide, Inc. | 0.63% | -47.68 | 19.73 | 23.44 | 2.85 | |
CME Group, Inc. | 0.63% | 1.52 | 24.63 | 22.28 | 4.41 | |
Cisco Systems, Inc. | 0.63% | 8.91 | 17.47 | 13.22 | 2.91 |
Past performance
Since 9/1/2003, FVD has underperformed SPY and the equal-weight S&P 500 (RSP). However, it is a bit less risky regarding maximum drawdown and standard deviation of monthly returns (“volatility” in the table below).
Total Return | Annual.Return | Drawdown | Sharpe ratio | Volatility | |
FVD | 306.36% | 7.23% | -52.49% | 0.52 | 13.47% |
SPY | 504.00% | 9.36% | -55.19% | 0.6 | 14.84% |
RSP | 518.01% | 9.49% | -59.92% | 0.56 | 17.05% |
Data calculation: Portfolio123.
The next chart compares the 10-year total returns of FVD, SPY, RSP and three very popular dividend ETFs with quality screening:
- Vanguard Dividend Appreciation Index Fund ( VIG )
- Schwab U.S. Dividend Equity ETF ( SCHD )
- WisdomTree U.S. Quality Dividend Growth Fund ( DGRW ).
FVD has been the worst performer of this group in 10 years.
FVD vs. benchmarks and competitors, 10-year total return (Seeking Alpha)
It has also been lagging benchmarks and competitors in 2023 to date:
FVD vs. benchmarks and competitors, 12-month total return (Seeking Alpha)
The sum of annual distributions has increased from $0.50 to $0.83 between 2012 and 2022. This is a 66% growth rate in 10 years, whereas the cumulative inflation has been about 29% in the same time (based on CPI). FVD distributions have beaten inflation, but peers have done much better: VIG shows a total dividend growth rate of 110% and SCHD is at 216%!
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 FVD since 9/1/2003 with a subset of the S&P 500: stocks with an above-average dividend yield, an above-average ROA, a good Altman Z-score, a good Piotroski F-score and a sustainable payout ratio. The subset is rebalanced annually to make it comparable with a passive index.
Total Return | Annual.Return | Drawdown | Sharpe ratio | Volatility | |
FVD | 306.36% | 7.23% | -52.49% | 0.52 | 13.47% |
Dividend & quality subset | 893.20% | 12.11% | -43.13% | 0.78 | 14.74% |
P ast performance is not a guarantee of future returns. Data calculation : Portfolio123.
FVD underperforms the dividend quality subset by 4.9 percentage points in annualized return. However, the fund’s performance is real and the subset is simulated. My core portfolio holds 14 stocks selected in this subset (more info at the end of this post).
Scanning FVD portfolio
FVD is cheaper than SPY regarding valuation ratios, as reported in the next table.
FVD | SPY | |
Price/Earnings TTM | 19.31 | 22.4 |
Price/Book | 2.55 | 3.99 |
Price/Sales | 1.84 | 2.55 |
Price/Cash Flow | 12.13 | 15.81 |
I have scanned holdings with the quality metrics described in the previous paragraph. I consider that 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 less relevant. With these assumptions, 16 stocks out of 168 are risky and they weigh about 9% of asset value, which is rather a good point.
Based on my calculation, the aggregate return on assets, Altman Z-score and Piotroski F-score are close to S&P 500 values. These metrics point to a portfolio quality similar to the benchmark.
FVD | SPY | |
Altman Z-score | 3.08 | 3.42 |
Piotroski F-score | 5.71 | 5.61 |
ROA % TTM | 6.86 | 7.1 |
Takeaway
First Trust Value Line® Dividend Index Fund ETF holds dividend stocks with a good Value Line Safety Rank. It follows an equal-weight methodology. The top 2 sectors, utilities and industrials, weigh 42% of assets in aggregate. FVD looks better than the S&P 500 index in valuation, and equivalent in quality. The fund has underperformed peers and benchmark, both in the long term and in 2023 to date. The Value Line Safety Rank screening slightly reduces drawdowns and volatility, but it seems a drag on the return. Moreover, the 10-year dividend growth rate is far behind popular competitors VIG and SCHD.
For further details see:
FVD: Lagging VIG And SCHD In Return And Dividend Growth