An Innovation For Dividend InvestorsAdvisor Perspectives
Brandon Rakszawski is Senior ETF Product Manager at VanEck, focusing on hard assets, commodity, and strategic equity products. He joined VanEck in 2011, and his responsibilities include product development, market research, competitive analysis, advertising, and public relations. Prior to joining VanEck, he was with Federated Investors, specializing in mutual fund product marketing and positioning. He is a frequent speaker and moderator at industry webinars. He earned his BS in Finance and Marketing from Slippery Rock University of Pennsylvania.
I interviewed Brandon last week.
You recently introduced the VanEck Vectors Morningstar Durable Dividend ETF (DURA). What was the background behind your decision to introduce this ETF?
Dividend investing is of particular interest to many investors in the U.S. and strategies focusing on dividend-paying stocks have received significant attention from investors for many years. It is easy to understand why. Dividend reinvestment has accounted for a significant portion of the broad U.S. equity market’s total return over long periods throughout its history. But, we believe there are flaws in traditional dividend investing strategies that can influence an investor’s experience over the long term.
Many dividend stock strategies rely entirely on historical metrics to assemble a portfolio of high yielding stocks or companies with a history of dividend consistency or even growth. These backward-looking methodologies may leave investors susceptible to dividend traps. Take high-yield dividend strategies. Often, investors are receiving that higher yield for a reason, which can come with elevated risk. Or, in the case of dividend consistency and growth strategies, some of these companies may look great for decades until something like 2008 happens, and long-time dividend payers end up reducing or cutting their dividends altogether.
VanEck is certainly not new to income investing. We offer many forward-looking, intelligently designed strategies in asset classes such as municipal bonds, high yield credit, international debt, and preferred securities, to name a few. DURA is our first broad U.S. dividend stock ETF. We set out to work with Morningstar to offer a strategy that not only targets high dividend yield, but considers a company’s future prospects when selecting for inclusion in the ETF’s underlying index, the Morningstar® US Dividend Valuation IndexSM.
The ETF is based on research from Morningstar on companies believed to have attractive valuations and strong financial health. What did you find most compelling about that research?
Similar to VanEck’s four moat investing strategies, DURA’s underlying index leverages Morningstar’s rigorous, forward-looking equity research. The Morningstar US Dividend Valuation Index reflects a portfolio of high-yielding U.S. stocks with attractive valuations and strong financial health.
Morningstar’s 100-person equity research team fuels the forward-looking valuation assessment used to construct the index. Morningstar’s cornerstone economic moat research is an input in determining its estimate of a company’s current fair value based on future cash flows, as opposed to backward-looking valuation ratios such as price-to-earnings.
While Morningstar’s Distance to Default score uses current and historical equity market and accounting data to measure financial health, the score has proven a strong indicator of the probability of future dividend cuts.
This durable dividend strategy of targeting high yielding companies with compelling prospects based on valuations and financial health was particularly attractive to us at this point in the economic cycle.
How diversified is the ETF, in terms of the number of holdings and exposure to various sectors and industries?
As of October 31, 2018, DURA consisted of 89 U.S. stock holdings. The index is dividend-dollar weighted meaning that dividend per share is multiplied by the number of shares that can be purchased (float). This retains the primary benefits of market-cap weighting (lower turnover and scalable investment capacity), while also maximizing yield. Individual security weights are capped at 5% at the time of each semi-annual index review.
Current sector exposure favors health care, consumer staples, and energy. However, all sectors are represented in the ETF with the exception of real estate. Unlike other backward-looking strategies, sector exposure is expected to change over time due primarily to the underlying index’s focus on valuations.
This introduction comes during a period of high market volatility and mostly downward price movement. How do you expect the ETF to perform under those conditions?
It is difficult to predict future performance, but we believe the focus on both valuations and financial health couldn’t come at a better time. We’re experiencing a level of volatility that we haven’t seen in years and experienced all-time market highs not that long ago.
So much focus has been paid to income-producing assets that any extra attention on valuations may help investors avoid overpaying for that income potential, and financially healthy companies may potentially be in a better position to weather any coming market storms.
Read the full article here by Advisor Perspectives