DGRO ETF Review [18 Dividend ETF Reviews, Part 1]

a few weeks ago i posted a poll on my community page and the overwhelming majority of you wanted to review all 18 of the dividend-specific etfs there's 18 etfs that have a total assets under management of 1 billion plus so over the next few weeks i'm going to do an in-depth review of each one of those etfs so the list here in alphabetical order starts with today's etf which is degrow if you want to get notified whenever the next etf video comes out you can hit the subscribe button down below and turn the little bell icon on and it will notify you whenever a new video is out also i'm going to put these into a playlist so i'll put a link right up here to the playlist so if you're watching this a couple weeks later and i've gone through all the etfs you can watch all 18 of those right there part one we're looking at the ishares core dividend etf ticker symbol is degrowd this video we're going to touch upon the quick introduction so we're going to look at what is degrow's dividend yield it's fees other just basic metrics then we'll get into the meat of the strategy so each of these etfs tracks an underlying index and so that index has a specific strategy that it follows so we'll look at that how that underlying index for degrow selects its stocks then we'll look at very important risk so how does degrow perform in down markets like the most recent you know 2020 covid crisis how did degrow do then also the holdings so what stocks and sectors does degrow own right now and then we'll look at a couple valuation metrics so how does the stand the underlying holdings stand on pe price to book price of sales and also the earnings growth of the underlying holdings and then finally at the very end of the video we'll look at performance so how has degrow the etf performed since inception we'll also look at how the underlying index for degrow has performed i've done a couple videos now on looking at performance of different etfs and constantly people say well wait a minute how did you find that performance all i see is you know going back to 2014 or 2012. well the key is you have to look at how the underlying index that degrow tracks or another another etf tracks that's where you'll find the performance of that index it gives you a much better idea of how it has performed going back to in this case 2003 whereas degrow only goes back to 2014. so that's at the very end of the video so stick around for that so first just a few quick facts this etf tracks the morningstar u.s dividend growth index so we're going to spend a lot of our time analyzing how that index works because that's really the driving factor for degrow the asset under management right now is 11.42 billion so it's a pretty decently sized fund the current dividend yield is 2.5 percent and a very impressive 0.08 expense ratio next we're going to look at the strategy that degrow follows so this is the morningstar us dividend growth index construction process so they start with a universe of securities from the morningstar u.s market index which is bigger than the s p 500 so it's including a lot more securities than just the large cap the security selection they actually take the top 10 percent dividend yield so they say you know rank them from say there's a thousand stocks that make it through they're taking the top 10 dividend yields and deleting them from the universe so it's eliminating those higher yield and often higher risk investments the dividend income must be qualified so that excludes reits and other securities that pay non-qualified dividend income the companies have to have at least five years of uninterrupted dividend growth with a slight caveat which we'll talk about in a second the all the stocks must also have positive consensus earnings forecasts meaning they're going to make money next year is the expectation and their payout ratio must be less than 75 so all the stocks that make it through these criteria will ultimately end up in the morningstar us dividend growth index so a couple other strategy details like i said reits are excluded because of the qualified income restriction the payout ratio meaning whatever the dividend is divided by the earnings both of those are actually forward-looking so it's taking the next 12-month dividend expectation what analysts expect them to pay divided by the forward 12-month earnings expectation what the analysts expect them to earn and that has to be less than or equal to 75 percent and then also if if a holding fails to increase the dividend it was the five year dividend uh criteria if a company fails to increase the dividend they can still remain in the index but they have to be net share repurchasers over the last year so kind of incorporating a little bit of a shareholder yield concept which i really like that about this particular index the weighting here is interesting so most indices are weighted by market cap so as the price per share increases uh the market value of the company increases the overall weighting in the index also increases this actually rewards companies who are paying more dividends so if a company raises their dividend by say 20 percent they're going to get a 20 higher weighting in the index it is based on total dividends so the stocks that pay out the most nominal dollars are going to be you know apple of course even though the yield is relatively small they're making a ton of money and they're paying out a very large total dollar dollar value and dividends so they're going to get a very large weighting and then the weightings are also capped using morningstar's 5 350 system uh and basically what that means is simply they don't want you know one stock to exceed five percent of the overall portfolio they don't want one specific sector making up more than 50 percent of the index i'm not sure what this three stands for i tried to look into that couldn't find any information on that but they are capping these so that it doesn't become too concentrated in one or two different stocks or one or two different now we'll talk about the risk of the portfolio so this is from morningstar's page gives us some data on the fund here so this is degrow the category is value so large cap value and then the index they're looking at is the russell 1000 so again this is a value comparison so the beta here is not like you would normally see it relative to the s p 500 but it is a little bit lower of a beta relative to the value index which is good beta just means you know for every 10 increase this fund will generally increase by 9.5 percent and for every 10 decrease it will decrease by 9.5 percent so generally speaking this is a lower risk fund relative to a traditional value fund this upside down side capture ratio is also a pretty interesting way to look at risk so the 94 just tells you that this fund generally captures 94 of the upside relative to the value index but it captures 100 of the downside so again that's not particularly great you'd rather see it flipped you'd rather see it capture more upside than downside in my opinion this is the most important risk metric we don't necessarily care about volatility or i don't i don't think you should either as long as it's upside volatility we don't want to penalize the stock for going up a lot having you know 40 percent volatility as long as it's going up 40 that's positive what we want to say is what is the the maximum drawdown right that is really what we're looking at top to bottom how much has this fund historically declined and how does that compare to other choices so you can see that the category and the index are both right around twenty six and a half percent maximum draw down now that was actually in two thousand and twenty so this year from january first to march thirty first this fund only dropped by 22 percent so on a top to bottom draw down basis this fund is actually does a pretty good job of reducing risk so now look at which stocks and sectors this fund owns right now as of august 2020 so here we've got a breakdown of all the different sectors these are according to the way morningstar categorizes them so you may see this a little different depending on which website you're looking at but again we're comparing relative to the value value funds so you can see the weightings here are are fairly similar across the board you know as we talked about earlier this fund does not own any reits because they're a non-qualified income so this is basically zero uh communication services is another one where you've got a decent disparity between the fund and the category the reason there is most likely that a lot of these communication services stocks have not paid or raised a dividend very long so that's one reason they are the energy sector you've had a lot of dividend cuts over the last five years so this is quite a bit lower than the the index similar industrial weight technology is quite a bit higher than the value index now keep in mind the s p now i believe is around 25 to maybe even 30 percent technology so you're still quite a bit less exposure relative to the s p 500 but compared to similar value funds it's it's quite it's a little bit higher defensives are a little higher but similar healthcare is basically identical as are utilities here are the top holdings in degrow right now so again these are weighted by total dividends paid so of course apple paying the most total dollars in dividends is the number one overall weighting at 3.7 then you have microsoft they're coming at number two verizon johnson johnson now we'll look at the performance of the degrow etf and its index so here first is the etf so year to date this fund has had a negative 2.3 total return which is actually significantly better than both the large value funds and the russell 1000 so these are are noted here as plus or minus so if this is positive it means it's outperformed by this percent this has outperformed the average large cap value mutual fund by 6.6 percent this year all of these numbers are positive out one year three year and five years so this five-year number is actually pretty impressive 11.6 percent has beaten the large value funds and the index by about five and a half to six percent per year which is which is quite impressive here it shows you the percentile rank so if it's in the lower number is better so you can see here that over the last five years this has ranked in the top two percent of large value funds performance for degrow is is pretty impressive now we'll look at the index performance so we can get back a little bit further than when the degrow was started morningstar u.s dividend growth index actually has back tested data using that same methodology going back to december 19th of 2003 so if we look at how that's performed since then the morningstar us dividend growth index is up 350 percent compared that to the s p 500 which is up 334 percent so since 2003 this methodology would have slightly outperformed the s p 500 i think this is a great a great fund really for a core holding the index is weighted by dividends instead of market cap that gives it a little bit more of a value tilt i put the exact same thing at over on the cons list because by waiting on my dividends and not waiting by market cap you're you're tilting more towards value which means you're generally tilting away from momentum and as you guys know if you follow my channel i'm a big fan of momentum both value and momentum have historically outperformed the market so you're doing good here by leaning more towards value you're just getting away from momentum which is also done well so it's a bit of a trade-off there this does avoid the highest dividend yielding stocks which means it's avoiding a lot of the really high risk stocks like most dividend stocks that have a high yield are that way for a reason it is well diversified so there's about 418 holdings i believe it's also very low cost at eight basis points the con with having 400 different stocks is that you're really not concentrated enough to outperform the s p 500 long term that may not be your objective so maybe that's fine for you you just want diversified access to dividend stocks this is a great way to do it the con if you're trying to beat the beat the s p is that if you own basically the entire s p 500s if you own 400 stocks you aren't really making big enough bets on specific companies to really have that much of a difference between the performance of the fund and the performance of the the s p 500 so you're probably not going to beat the s p long term this is a core diversification holding that's that's really where its strength is and then the last negative and this is a bit of an unknown at this point but since it's using the forward payout ratio so forward dividends and forward earnings the covid crisis has really collapsed a lot of the earnings expectations for stocks so what you're getting right now is a lot of companies are going to have a forward payout ratio that's over 75 percent that should be a temporary drop as we move past this and the economy starts to recover we should see that be alleviated but right now it could be a bit of an issue so i don't know how the fund how the index is going to handle that so that's a little bit of a concern at least in the very near term you

Channel: Nathan Winklepleck, CFA

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Id: L3r9Py84FjA

Length: 17min 5sec (1025 seconds)

Published: Sat Aug 15 2020