Dividend exchange-traded funds (ETFs) represent a significant percentage of the overall ETF universe and an even bigger chunk of the smart beta space. In the U.S., there are more than 200 dividend and income ETFs available to investors, some of which are also among the largest smart beta strategies.
Evaluating dividend ETFs solely on size can be deceiving. The four largest U.S.-listed dividend ETFs have about $81 billion in assets under management. After that quartet, no other competing funds have more than $7.42 billion in assets. A fair percentage of these funds do have over $100 million in assets, however, the much-ballyhooed mark that industry observers believe means an ETF is profitable.
Another way of looking at the universe of dividend ETFs is that it is expansive enough for hidden gems. There are a plethora of dividend ETFs that can be considered under the radar. Although some of those funds do not get attention on par with their more heralded rivals, they do merit consideration by income investors.
Consider this quintet of somewhat undiscovered dividend funds.
Under-the-Radar Dividend ETF: FlexShares Quality Dividend Index Fund (QDF)
Expense ratio: 0.37% per year, or $37 on a $10,000 investment.
The usual reasons why ETFs, dividend or otherwise, lack for publicity and investor adulation are age and size. Neither condition afflicts the FlexShares Quality Dividend Index Fund (NYSEARCA:QDF), which turns six years old later this year and has $1.92 billion in assets under management.
QDF tracks the Northern Trust Quality Dividend Index, a benchmark that emphasizes quality. Quality is a vital investment factor for dividend investors because it can measure balance sheet strength, management commitment to dividends and companies’ ability to continue raising payouts.
Home to 143 stocks, QDF allocates 22.32% of its weight to technology stocks, one of the largest weights to that sector among all dividend ETFs. Financial services and industrial names combine for almost 27% of the fund’s weight. QDF also employs a unique methodology to ensure the sustainability and viability of components’ payouts.
The Dividend Quality Score (DQS) profiles “similar firms against each other — it also identifies quality companies in every sector, supporting diversification even in the initial construction process,” according to FlexShares.
Under-the-Radar Dividend ETF: Oppenheimer Ultra Dividend Revenue ETF (RDIV)
Expense ratio: 0.39% per year
The Oppenheimer Ultra Dividend Revenue ETF (NYSEARCA:RDIV) is a yield-weighted strategy. RDIV “invests in the securities in the S&P 900 with the highest trailing dividend yield. Each of these securities is then weighted by top line revenue, instead of market capitalization,” according to Oppenheimer.
An advantage of RDIV’s revenue-weighted strategy is that it can help investors avoid richly valued stocks. That takes on added importance when acknowledging that many high-dividend stocks can trade valuations in excess of the broader market. RDIV holds 62 stocks and has a trailing 12-month dividend yield of 4.16%.
Typically, yield-weighted funds are heavy on real estate, telecommunications and/or utility stocks. That is the case with RDIV as this dividend fund has a combined weight of 47% to those sectors.
Interestingly, RDIV’s largest sector allocation is 29.3% to consumer discretionary, a massive overweight to that group relative to the S&P 500. RDIV’s standard deviation is roughly in line with that of the broader market, indicating this fund is not highly volatile.
Under-the-Radar Dividend ETF: FlexShares International Quality Dividend Index Fund (IQDF)
Expense ratio: 0.47% per year
The FlexShares International Quality Dividend Index Fund (NYSEARCA:IQDF) is the international counterpart to the aforementioned QDF. International dividend ETFs are usually smaller than their U.S. relatives, but that smaller size belies the opportunity set with ex-U.S. dividend-paying stocks.
IQDF, which has over $1 billion in assets and turns five years old next month, includes some emerging markets exposure. Taiwan, Russia and China, arguably the most credible emerging markets dividend destinations, are IQDF’s emerging world exposures, but this is primarily a developed markets fund. IQDF, which has a trailing 12-month dividend yield of 3.93%, has slightly outpaced the MSCI EAFE Index over the past three years.
IQDF is not a yield-weighted strategy, something that can work in investors’ favor with international markets.
“Blindly focusing on yield in the international sector, however, could be dangerous to an investment portfolio’s health,” said FlexShares. “Often, a seemingly generous dividend yield may actually signify a weak share price tied to negative news not yet revealed in the quarterly dividend.”
Under-the-Radar Dividend ETF: ALPS Sector Dividend Dogs ETF (SDOG)
Expense ratio: 0.40% per year
The ALPS Sector Dividend Dogs ETF (NYSEARCA:SDOG) is a yield strategy with a value tilt. Actually, SDOG is a viable alternative to standard value funds as this dividend ETF has topped the S&P 500 Value Index by 410 basis points over the past three years.
SDOG also includes some layers that help reduce risk, particularly when measured against other yield-based strategies. This dividend ETF equally weights its individual holdings, helping reduce investors’ exposure to single stock risk and overvalued equities. Additionally, SDOG’s sector lineup is also equally weighted.
Under-the-Radar Dividend ETF: Pacer Global Cash Cows Dividend ETF (GCOW)
Expense ratio: 0.60%
Most dividends are paid in cash and that is why so many professional investors evaluate the cash positions of companies when assessing the ability of those firms to continue growing payouts. The Pacer Global Cash Cows Dividend ETF (CBOE:GCOW) focuses on free cash flow (FCF).
“Using free cash flow yield to measure the sustainability of a company may produce a higher return with lower volatility over time,” according to Pacer. “Companies with a high free cash flow yield and a high dividend yield have historically declined less in market downturns.”
At the end of 2017, GCOW had an impressive dividend yield of 4.12% and an even more impressive FCF yield of 5.62%. GCOW’s largest sector allocation is 16.2% to telecom, while the two consumer sectors combine for over a third of the ETF’s weight.
This dividend fund’s top 10 country weights — including the U.S., the U.K. and Japan — combine for almost 94% of the ETF’s geographic exposure.
Todd Shriber does not own any of the aforementioned securities.