A Peek Under The Hood Of The New O’Leary Dividend ETF

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July 22, 2015 4:57pm FUND LAUNCH NYSE:HDV

newetfDavid Fabian:   Kevin O’Leary, of Shark Tank fame, has morphed into of the most polarizing investment figures on reality TV. Now he is taking his talents off-camera by releasing his first U.S.-listed exchange-traded fund focused on dividend paying stocks.


The O’Shares FTSE US Quality Dividend ETF (OUSA) debuted this week to a great deal of intrigue by the financial media. Whether you love or hate O’Leary for his no-nonsense criticism and direct business style, this new ETF is certainly worth a look for serious income investors.

According to the fund company website, “The Fund is designed to be a core investment holding that seeks to provide cost efficient access to a portfolio of large-cap and mid-cap high quality, low volatility, dividend paying companies in the U.S. selected based on certain fundamental metrics.”

To achieve that end result, OUSA follows the FTSE U.S. Qual/Vol/Yield Factor 5% Capped Index. This fundamentally driven methodology selects stocks based on three core factors – quality, volatility, and yield. The final portfolio is made up of 142 dividend paying companies with an average yield of 3.20%.

Top holdings include well-known names such as Johnson & Johnson (JNJ) andExxon Mobil (XOM). In addition, each of the underlying constituents is capped at a maximum 5% allocation so as not to significantly overweight a single position.

I think it’s an important distinction to make that O’Leary is essentially the face of this company and not involved in any direct investment recommendations. This ETF is designed to follow a strict passively managed index without worrying over deviating into uncharted waters as some active funds can do.

The current next expense ratio of OUSA is listed at 0.48%, which is on the high side for a passive ETF. Nevertheless, the fundamental selection criteria (read: smart beta) is one of the reasons that the fund company may feel justified to charge more for their ETF versus its peers.

After analyzing the top 10 holdings of OUSA, my initial conclusion is that this ETF falls closest in nature to the iShares Core High Dividend ETF (HDV). Both funds share 8 of their top 10 holdings and are dedicated to a more concentrated mix of high quality dividend stocks. HDV currently has $4.5 billion in assets, an expense ratio of 0.12%, and a 30-day SEC yield of 3.90%.

It’s worth noting however, that although there are similarities between the two funds, there are also significant differences too. HDV has very high asset concentrations in its top holdings, which currently make up 59% of the portfolio. The top 10 holdings in OUSA make up just 38% of its asset allocation.

In addition, HDV has a great deal more energy and telecom exposure that is supplanted by technology and health care in OUSA. These portfolio weightings are likely to change over time as market factors and other conditions evolve.

Vanguard investors can breathe easy that the Vanguard High Dividend Yield ETF (VYM) shares 7 of the same top 10 holdings in OUSA as well. However, VYM covers a much broader spectrum of over 400 stocks.

The Bottom Line

Despite its higher expense ratio, OUSA appears to be constructed of a very solid mix of dividend paying stocks through a dependable index provider. Currently this ETF does offer enough differentiating factors to make it worthy of your consideration when comparing equity income funds.

It will be interesting to follow how much initial attention is generated in OUSA based on fund flow data, as well as how the portfolio adapts over time. The market for dividend ETFs is certainly filled with many beloved products and attracting attention may prove to be a difficult battle.

According to prospectus filings, O’Shares is set to debut four additional international-focused dividend ETFs in the near future as well.   That will help round out the fund family and offer strategies designed to excel under differentiating circumstances.

This article is brought to you courtesy of David Fabian from FMD Capital Management.


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