QDEF FlexShares Quality Dividend Defensive Index Fund

Even with the Fiscal Cliff and the dividend tax hike debate, high yielding securities remain popular. These securities offer up some respite for those who are looking for decent levels of current income in a world with Treasury bonds yielding less than 2% for mid-term securities.

Due to this high demand, ETF providers haven’t exactly been shy about putting new, targeted products out there that have an income focus. These include a leveraged REIT ETN (MORL), a tech dividend product (TDIV), and more options in the preferred market as well, suggesting that the dividend focus hasn’t been limited to a particular market segment by any means (see 11 Great Dividend ETFs).

In continuing with this trend, Northern Trust’s ETF arm, FlexShares, has released three more dividend focused ETFs, giving investors even more options in the income world. While the three will have a tough fight to obtain assets in the competitive space, their relatively low expense ratios (of 37 basis points each) and potentially novel techniques could make them interesting picks for income-starved investors.

The most important of which is how all three utilize the Northern Trust Dividend Quality Score. This metric is a proprietary quantitative methodology that uses a variety of fundamental factors to look at the strength and quality of a dividend record and future prospects of a payout (read Three Impressive Small Cap Dividend ETFs).

It focuses in on three key factors including management efficiency and dividend policy, profitability, and cash flows to sustain robust payments. All three funds that utilize this metric, which are highlighted in greater detail below, look to use this system to beat out the Northern Trust 1250 Index (known as the parent index below), in terms of yield, potentially acting as an income replacement products for many investors seeking a new dividend play in today’s low yield environment:

Quality Dividend Index Fund (QDF)

This ETF tracks the Northern Trust Quality Dividend Index which looks to provide exposure to long-term growth potential of U.S. stocks, while also allowing for solid levels of income. The fund holds 181 firms in its basket, while it is tilted 80/20 towards large caps and away from mid caps.

The fund looks to replace traditional market-weighted equity funds by applying a proprietary scoring model to determine quality. This looks to be done while matching the parent’s beta while also improving on the parent’s yield as well.

In terms of sector exposure, financials take up nearly 20% of assets, and these are closely trailed by technology at just under 15.65% of the total. Energy and consumer staples round out the top four, while materials and telecom account for the bottom two sectors in the fund (read Three Excellent Dividend ETFs for Safety and Income).

Dividend Dynamic Index Fund (QDYN)

For a slightly higher beta look at dividends in the U.S. market, investors now have QDYN, a product that follows the Northern Trust Quality Dividend Dynamic Index. This benchmark produces a fund that holds just under 200 securities, while having a tilt of about 70/30 in favor of large caps and away from mid cap stocks.

Like its QDF counterpart, this product also looks to replace traditional market-weighted products while putting a heavy focus on quality. However, this product looks to have a higher beta than the parent in addition to having a bigger yield than the parent benchmark as well (read Can You Beat These High Dividend ETFs?).

Exposure in this product is also tilted towards financials, as these account for just over 19.5% of assets, followed by technology at 15.55%. Consumer discretionary and energy round out the top four, leaving little for telecoms and materials once again.

Quality Dividend Defensive Index Fund (QDEF)

While the first sought out a beta in line with the parent, and the second looked for a higher beta, this product looks to have a lower overall beta than the Northern Trust 1250, following the Northern Trust Quality Dividend Defensive Index. This benchmark leaves us with a fund that has just over 175 securities, and a large cap tilt (70%), although not as much as others on the list.

Once again, the focus on quality is paramount, although a look to lower beta securities is also a key component. At time of writing, beta was below 0.9 so it could make for a slightly less volatile play in the broader dividend market (see No Dividend Tax Debate for these High Yield ETFs).

For holdings, financials are again the biggest at just under 19.3% of assets, trailed by tech at 15.7%. Staples and energy once more round out the top four. Meanwhile, on the other side of the portfolio, materials and telecoms are the two smallest segments, accounting for less than 9% of the assets combined.

These three join an incredibly dense field that is populated with literally dozens of names. The key to their quest for AUM will undoubtedly be the ‘DQS’ score, and if investors embrace this as a way to achieve yield. If they do, this trio could definitely carve out a niche, although it will definitely be a hard fight in this crowded space.

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(QDEF): ETF Research Reports
 
(QDF): ETF Research Reports
 
(QDYN): ETF Research Reports
 
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