The list of best performing equity ETFs in the US thus far this year has been dominated by two categories: 1. Leveraged/Inverse – almost always the case by definition and 2. Single industry/sector – including energy, utilities, defense, and insurance et al. Leveraged and inverse ETFs are short-term trading tools that are very rarely, if at all, suitable for most investors. Because these two categories are so inappropriate for many investors, what to do? Low volatility and high dividend yield funds have out performed as well and are readily accessible.
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For the most part, sector and industry ETFs are cyclical timing tools. Sectors and industry groups tend to fall in and out of favor during different market and economic cycles. It is difficult for most investors to time when to get into and out of a particular sector or industry group, but savvy investors will try and sometimes succeed.
The two exceptions to this rule are utilities and consumer staples. Those two sectors have two important characteristics that VOO and other S&P 500 ETFs do not: lower return volatility and higher dividend yields. For income-oriented investors, especially those with a less-than-10-year time horizon in which they need to access capital, funds in those two sectors (e.g., VPU, Vanguard Utilities ETF and FSTA, Fidelity Consumer Staples ETF) can be good compliments within a core that also contains growth-oriented ETFs such as VOO.
The overall point is that unless the primary goal is income generation, most sector ETFs, such as the Energy, defense and commodities-based ETFs that exploded in the first half of 2022, are generally tactical rather than strategic holdings. Volatility and cyclicality render these products unsuitable as all-weather holdings for most long-term investors.
Many clients of financial advisors and direct investors are more comfortable with ETFs that they can hold in most markets without needing to anticipate cycle changes. That doesn’t necessarily mean that the only ETFs they should hold are S&P 500 ETFs. For income-oriented investors and those needing to draw capital without a significant risk of drawdowns, ETFs that emphasize low volatility, value and high dividends can be an appropriate addition or substitute for core index and alpha-seeking ETFs.
Of the 677 equity funds that fit one of Morningstar’s nine categories, only 33 delivered positive returns for the past one-year period and the top 20 were all large- or mid-cap value funds. The top four of these were also low-volatility and high dividend funds. Those four funds were the only funds to somehow manage to deliver positive returns year-to-date as compared with -19% for S&P 500 ETF VOO.
Current ValuEngine reports on these ETF’s can be viewed HERE
In order of one-year return, these include:
FDL – First Trust Morningstar Dividend Leaders ETF (10%);
DHS – Wisdom Tree US High Dividend ETF (9%);
HDV – iShares Core High Dividend ETF, (7%); and
GBDV – Global Beta Smart Income ETF (7%).
All six benchmark index ETFs are down substantially as shown here. For reference, the last two columns compare the data for VOO as of July 1, 2022, with VOO as of December 31, 2021. The differences are striking.
| FDL | DHS | HDV | GBDV | VOO | AGG | |
| ETF Name | First Trust Morningstar Dividend Leaders ETF | Wisdom Tree US High Dividend ETF | iShares Core High Dividend ETF | Global Beta Smart Income ETF | Vanguard S&P 500 ETF | iShares Core US Aggregate Bond ETF |
| ValuEngine Rating | 3 | N/A | 4 | 1 | 3 | N/A |
| Assets Under Mgmt. -AUM | $ 3 Billion | $1.2 Billion | $13 Billion | $6.7 Million | $247 Billion | $ 82 Billion |
| Historic YTD. Total Return | +0.5% | +0.7% | +0.4% | +1.2% | -19.0% | -9.4% |
| Historic 1-Yr. Total Return | +9.7% | +8.8% | +6.9% | +6.6% | -10.7% | -9.5% |
| Historic 3-Yr Ann. Total Return | 8.9% | 8.2% | 5.4% | N/A | 10.4% | -0.6% |
| Historic 5-Yr Ann. Total Return | 8.7% | 7.6% | 7.5% | N/A | 11.4% | 1.1% |
| Historic 10-Yr Ann. Total Return | 10.5% | 9.8% | 9.2% | N/A | 13.0% | 1.6% |
| VE Forecast 1-yr. Price Return | -0.6% | N/A | +0.7% | -2.2% | -0.6% | N/A |
| Volatility | 18.0% | 18.2% | 16.6% | 26.6% | 17.1% | 4.6% |
| Sharpe Ratio (5-Year) | 0.46 | 0.40 | 0.40 | 0.15 | 0.62 | 0.24 |
| Beta | 0.90 | 0.88 | 0.84 | 1.07 | 1.00 | 1.00 |
| # of Stocks | 100 | 751 | 76 | 95 | 500 | 10,000 |
| Undervalued by VE %* | 76% | N/A | 53% | 60% | 65% | N/A |
| P/B Ratio | 2.8 | 2.8 | 3.9 | 2.5 | 4.1 | N/A |
| P/E Ratio | 15.4 | 16.1 | 17.8 | 17.3 | 20.7 | N/A |
| Div. Yield | 3.5% | 3.4% | 3.2% | 2.0% | 1.6% | 2.0% |
| Expense Ratio | 0.45% | 0.38% | 0.08% | 0.29% | 0.03% | 0.03% |
| Index
Scheme |
Dividend Weighting | Dividend Weighted | Dividend Weighting | Revenue Weighting | Mkt. Cap Weighting | Dollar Weighted by Issuance |
| ETF Sponsor | First Trust | Wisdom Tree | iShares by Blackrock | Global Beta | Vanguard | iShares by Blackrock |
Current ValuEngine reports on these ETF’s can be viewed HERE
Observations
- As expected, VOO had the highest total returns for the three-, five- and ten-year periods while suffering huge underperformance in the short term next to the four top-performing ETFs, all oriented towards low volatility, high current income, and attractive value ratios. The data reinforce the thesis that long-term investors not needing current income or to withdraw money from the account should stick to a growth-centric core as represented by the S&P 500.
- For the ten-year period ending July 15, 2022, the first 9.5 of which were as strong as the S&P 500 has ever enjoyed, the trade-offs in total return in exchange for lower drawdowns, lower Betas, and higher dividend yields seem very reasonable. This is particularly true for FDL, First Trust Morningstar Dividend Leaders ETF and HDV, iShares Core High Dividend ETF. 10.5% annual return. For those needing access to principal and current income, receiving double the dividend yield and still getting 10%+ annual growth while averting drawdowns is more than adequate compensation for an additional 3% per year total asset growth when compared to VOO.
- On traditional value ratios, all four value ETFs are less expensive than the S&P 500 with FDL providing the best ratio values and dividend yield while HDV has the lowest volatility. Another way we look at attractiveness from a value perspective is by the percentage of portfolio holdings rated as undervalued by our models. FDL fares best here with 76% of its stocks considered undervalued. FDL also has a buy signal from ValuEngine’s predictive models for year-ahead performance (4 rated).
- On a cost basis, HDV by iShares is the clear winner, Its 8 basis points (0.08%) expense ratio is just 5 basis points higher than VOO’s 3 basis points while FDL has the highest expense ratio at a whopping 35 basis points.
- AGG is included to provide another somewhat surprising comparison. Traditional asset allocations include an allocation to bonds to minimize drawdowns and provide income. For this specific period, FDL and its peers did a much better job of both than AGG. Of course, hindsight is 20-20 and these potentially anomalous characteristics may not hold true in most periods going forward. Nonetheless, as shown, the trade-offs for investors in this category is worth subordinating attempts at core-relative alpha.
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Perspective
This bear market has provided an unusual skew of outperformance for ETFs combining tilts toward income low volatility, and value characteristics. In bull markets or even average return markets, this is unlikely to be the case, but the goals of low volatility and higher-than-average income should continue to be reached.
July has begun with the seedlings of a rally. Time will tell whether it’s a bear market rally or the start of a new bullish period. Investors and their advisors might wish to prioritize the goals of the account over predicting whether or not this is the beginning of the end for the bear. FDL and HDV are worthwhile investigating for the clients described above. Investors with the same objectives but more comfortable with active management oversight and nimbleness might also take a look at DIVZ, TrueShares Low Volatility Equity Income ETF managed by Austin Graff of Titleist Asset Management. It is the top performing active fund in this category with more than $50 Million under management.
Accounts with longer time horizons and growth as the prime objective should stick to traditional core growth holdings such as VOO or VTI, Vanguard Total US Market Equity ETF. Competitively active alternatives for 5-year and recent performance include SYLD, Cambria Shareholder Yield ETF managed by the famed Meb Faber and PSET, Principal Quality ETF. Even though the latter is rated to underperform during the next 12 months with a 2 rating by ValuEngine’s models, the combination of its team’s excellent track record and strong underlying fundamental characteristics make PSET worthy of checking out as a potential holding. As always, due diligence and staying true to client objectives are the keys to success.
By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc
www.ValuEngine.com
support@ValuEngine.com
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