2023-12-14 21:46:28 ET
Summary
- T. Rowe Price Dividend Growth ETF is an actively managed ETF that aims to provide dividend income and long-term capital growth.
- TDVG's benchmark is the S&P 500 Index, and it focuses on large and midcap dividend-paying stocks.
- While TDVG has defensive advantages and lower volatility, I prefer tactical ETF rotation to "big and classic" active funds like this one.
If you are new to ETFs, then welcome to my world! And part of that world is getting a bird's eye view of one of the most significant transitions Wall Street has seen, ever. The mutual fund, preparing to celebrate its 100th birthday (the first one debuted in 1924), is also celebrating the acceleration of its demise. Sure, such funds will exist for a very long time. But they are being replaced methodically by Exchange Traded Funds. The latest indication is in the form of T. Rowe Price Dividend Growth ETF ( TDVG ). If that fund names sounds familiar, it is because it has been a mutual fund since 1992, with over $20 billion in assets. But it now exists in an ETF form as well, as is the case for an increasing number of funds from this company, Fidelity, DFA and others. This link tells the story.
TDVG is essentially a clone of a set of share classes for that same-named mutual fund. The ETF is just over 3 years old and has about $334 million in assets, so the transition to this form of fund is going to be gradual. But the message is sent, and investors should get used to seeing more such debuts of familiar mutual fund brands in the ETF ecosphere.
TDVG: one of many mutual funds that have added a clone ETF version
TDVG and its peers are adding an active management dimension to what was once primarily an ETF industry focused solely on index-based vehicles. As with its mutual fund clone, this ETF has the potential to produce strong long-term risk-adjusted returns against an economic backdrop of elevated inflation, higher interest rates and weakened economic growth. And it does so while aiming for an above-average dividend yield, though the focus is more on the ability of the roughly 100 companies it owns to grow those annual payouts to shareholders.
TDVG's analyst team not only looks for growth in dividends, but earnings as well. This is different from a high-yield equity ETF in that respect. It does not aim to trade off growth to be a yield hog, as other dividend ETFs will.
TDVG has a value bent, seeking to buy positions in companies believed to be undervalued or out of favor. Interestingly, TDVG’s benchmark is the S&P 500 Index ( SPY ) rather than the S&P 500 Dividend Aristocrats ( NOBL ) or the S&P Midcap 400 Dividend Aristocrats ( REGL ). The portfolio is built using large and midcap dividend-paying stocks.
As an actively managed ETF, TDVG will underweight or overweight sectors of the benchmark based on their economic expectations for the sectors. For example, as of their last disclosure at the end of September, the ETF was significantly underweight information technology, consumer discretionary, commercial services and overweight health care, financials, industrial services and utilities. That sector tilting versus SPY can be a source of outperformance or underperformance, as with any actively managed investment fund.
There is even a degree of inflation protection built in through upfront cash dividend growth. Companies understand that investors seeking income and capital appreciation detest dividend cuts and suspensions, therefore dividend payments tend to be much less volatile than corporate profits.
While there is a degree of downside protection and inflation resistance inherent in this style, it is important to put that in context. This is still a stock portfolio, and in the worst of times, great companies can be awful stocks, thrown out with the bathwater, so to speak.
TDVG: Hold rated due to my lack of enthusiasm versus a tactical ETF approach
I currently rate TDVG a Hold for several reasons. Primarily, I don't see enough alpha potential on a consistent basis here. I'd rather navigate the equity market via tactical rotation of a set of ETFs of my choosing. I am my own active manager!
And, while I wanted to include some active ETFs in my overall coverage on Seeking Alpha, a big drawback is the limited transparency of active ETFs managed by behemoth fund companies. They are not "too big to fail" but rather "too big to show investors what we are doing in real-time, since it can take us days to move in and out of a position and we don't want hedge funds piggybacking us." That's one reason that all things being equal, I lean toward more under the radar ETFs in my work, at least beyond the swing trading part of my investment life.
So, I'm happy to see funds like TDVG arrive on the scene, but in most cases, I suspect I'll pass on following them as closely as I do the traditional ETFs I have devoted decades to understanding and writing about to investors. But as an ETF geek, I share the enthusiasm and "vote of confidence" for the ETF structure that is implied by the deluge of big fund company ETFs hitting the market, a trend that is highly likely to continue.
Don't say goodbye to the good old mutual fund, but realize that it now has its limits compared to ETFs, and the market is voting with its feet. The sooner investors start to do a deeper dive than most currently do around this situation, the better off I think they will be in the long run.
For further details see:
TDVG: A Blue Chip T. Rowe Price Mutual Fund Goes The ETF Route