2023-07-24 07:30:00 ET
Summary
- The article discusses the financial benefits of investing in ESG (Environmental, Social, Governance) or SRI (Socially Responsible Investing) Funds, specifically the Timothy Plan High Dividend Stock ETF.
- The Timothy Plan High Dividend Stock ETF is compared to the Invesco High Yield Equity Dividend Achievers ETF, with a focus on return, risk, and income.
- Both ETFs have dividend achievers as a goal , with PEY generating twice the income as TPHD, though the overall returns slightly favor TPHD currently.
- I've heard readers are not fond of Hold ratings, but that is the best I feel each deserves at this time.
(This article was co-produced with Hoya Capital Real Estate )
Introduction
One of the continuous debates is whether investors are better off financially buying owning ESG (Environmental, Social, Governance) or SRI (Socially Responsible Investing) Funds. After all, they can deal with those issues elsewhere in their life and leave their portfolio for what it’s main (only) purpose, growth and/or income generation. I will leave that for readers to debate but it would be great if an investor could “invest good” and not forgo any investing results.
While those cases are rare, the Timothy Plan High Dividend Stock ETF ( TPHD ) so far has done that compared to another yield-focused only ETF, the Invesco High Yield Equity Dividend Achievers ETF ( PEY ). This article will review the strategy and composition of each ETF and compare features, plus what counts most to investors: return, risk, and income.
Invesco High Yield Equity Dividend Achievers ETF review
Seeking Alpha describes this ETF as:
The fund invests in stocks of companies operating across diversified sectors. It invests in growth and value stocks of companies across diversified market capitalization. It invests in dividend paying stocks of companies. It seeks to track the performance of the NASDAQ US Dividend Achievers 50 Index . PEY started in 2004.
Source: seekingalpha.com PEY
PEY has $1.3b in AUM and comes with 52bps in fees. The TTM Yield is 4.47%.
Index review
The NASDAQ US Dividend Achievers TM 50 Index is comprised of the top 50 securities by dividend yield from the NASDAQ US Broad Dividend Achievers TM Index. That Index is comprised of US accepted securities with at least ten consecutive years of increasing annual regular dividend payments.
Source: indexes.nasdaqomx.com
PEY holdings review
The sector allocations favor both Financial and Utility stocks.
invesco.com; compiled by Author
With only 50 holdings, the Top 25 account for 61% of the portfolio, indicating a more balanced allocation than many funds with the smallest position is still over 1%.
invesco.com; compiled by Author
PEY distributions review
While down from the 10-year CAGR of over 7.5%, PEY payouts were still growing over 4% in the last 1–5-year periods. This, plus other results, earned the ETF an "A+" grade from Seeking Alpha.
seekinglpaha.com PEY scorecard
Timothy Plan High Dividend Stock ETF review
Seeking Alpha describes this ETF as:
The fund invests in stocks of companies that follow the values and teachings of the Christian religion. It seeks to track the performance of the Victory US Large Cap High Dividend Volatility Weighted BRI Index , by using full replication technique. The fund does not invest in stocks of companies operating across production or wholesale distribution of alcohol, tobacco, or gambling equipment, gambling enterprises, or which is involved, either directly or indirectly, in abortion or pornography, or promoting anti-family entertainment or non-biblical lifestyles sectors. The ETF started in 2019.
Source: seekingalpha.com TPHD
TPHD has only $188m in AUM with fees that match PEY at 52bps. The TTM Yield here is 2.32%, or less than half what PEY provides to investors.
This how the manager describes their ETF:
Timothy Plan’s High Dividend Stock ETF is an exchange traded fund that employs a proprietary volatility weighting methodology for a broader exposure among blue chip stocks. It is a fund aiming to reduce exposure to market volatility while striving to generate higher returns than major market indices, while also placing an emphasis on dividend producing companies.
Source: timothyplan.com TPHD
Index review
The Index is comprised of the largest 100 dividend yielding stocks among the largest U.S. companies by market capitalization from the Victory U.S. Large Cap Volatility Weighted BRI Index , with positive earnings in each of the four most recent quarters. The Index then eliminates the companies that do not satisfy the eVALUEator proprietary Biblically Responsible Investing (“BRI”) filtering criteria. The remaining stocks are weighted based on their daily standard deviation (volatility) of daily price changes over the last 180 trading days.
Source: timothyplan.com Index
The index used was developed by the ETF's sub-advisor.
TPHD holdings review
The sectors allocations are:
I will compare these against PEY later. TPHD holds twice the number of stocks as PEY does at 100. Here the Top 25 account for just under 33% of the portfolio; the smallest 25 for 17%, still a well-balanced allocation policy.
timothyplan.com; compiled by Author
TPHD distributions review
This ETF has a radically different payout growth history than PEY does and not one that would appeal to investors needing steady income. Not surprising, Seeking Alpha gives this ETF a very poor "D+" grade, though that is partially due to its short history.
seekingalpha.com TPHD scorecard.
Comparing ETFs
With only seven stocks in both portfolios, one could own both with little duplication. The sector differences show PEY favoring Financial and Communication Services and TPHD Industrials, Energy, and Technology, compared to what the other ETF holds. The sector allocations show PEY being invested in areas less dependent on a strong economy than where TPHD has its holdings.
Their style boxes as provided by Morningstar, show additional differences to consider when selecting either ETF to own.
advisors.vanguard.com compare
I was surprised, even for ETFs that have "dividend" in their name, for both ETFs to have literally no exposure to Growth stocks. While both have 25% in Large-Cap stocks, PEY dwarfs TPHD in their allocation to Small-Cap stocks, where TPHD has almost nil. The third major allocation difference is PEY is heavy into Value stocks, whereas TPHD is more in the middle with 65% of the portfolio in what are classified as Blended stocks.
While all of the above are snapshots in time, the following data shows what investors have achieved over time.
While TPHD has been ahead most of the time, the difference really expands over the past year due to PEY's very poor results.
If you look at the sector differences with PEY holding less Technology and energy stocks, this becomes explainable. The question then becomes, which sectors will be better going forward?
As the next chart shows, the current yield difference is not new, it has been there since TPHD started in 2019.
Seeking Alpha grades and ranks US ETFs on multiple factors. Here is how they compare.
seekingalpha.com homepages
While the Quants favor TPHD over PEY, neither is highly ranked within their class or sub-class.
Portfolio strategy
I am a member of the Investment Principles Committee for a large church sponsored pension fund that by the denomination rules screens out stocks that they find incompatible with our principles. There are years when the results lag unrestricted benchmarks but in the long run the pensioners have benefited from these restrictions. The full Pension Board believes we are still meeting our fiduciary duty, which is do best by those whose funds we manage. Of course, not all 100,000 pensioners agree; some even want to expand the list for climate or moral reasons.
I relate that as it highlights the basic question: Should my investments reflect my belief system or be invested outside that concept? Each investor makes that call, though few can make that call for some of the funds that are invested on their behalf. SRI and ESG funds were designed for investors wanting some control. One of the debates today is whether pension and retirement account managers can use ESG/SRI criteria and still be okay with the SEC’s definition of them being a fiduciary, knowing you can be fined if caught outside their rules.
How each investor feels about the topic will help determine the trade-off, if needed, they are willing to make between having a clean conscious and maximizing returns. There are means to press forward your ESG/SRI values outside one’s portfolio. Also, by making more, those extra funds can be donated to causes that directly address the issues that concern that investor.
Final thought
Until recently, investors in each ETF have had about the same return, with PEY owners pocketing almost twice the level of income as TPHD owners. With each investor having unique opinions on where the US economy is headed, thus which sectors are best, which ETF to prefer at this time is highly dependent on that allocation and to the allocation differences as shown in the Morningstar boxes. For investors looking outside TPHD's SRI strategy, their allocations within that strategy are more important than the stocks they won't hold.
I've heard readers are not fond of Hold ratings, but that is the best I feel each deserves at this time.
For further details see:
TPHD Vs. PEY: Social Screening With Higher Return But Less Income