Fidelity entered the smart beta ETF space back in September with six new fund launches including one of their promising offerings, the Fidelity Core Dividend ETF (FDVV).
Dividend ETFs have been especially popular over the last couple years as investors continue searching for alternatives to low yielding Treasuries. The space, however, is incredibly competitive with funds such as the iShares Select Dividend ETF (DVY), the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation ETF (VIG) already owning tens of billions of dollars in assets. With just $20 million in assets and a three month history, the Core Dividend ETF has a long way to go to become more than a bit player but the fund is off to an encouraging start.
Since its inception, the Core Dividend ETF’s 3.9% return trails only that of the Vanguard High Dividend Yield ETF (VYM) among its dividend ETF peers and tops the 3% return of the S&P 500 during the same time frame. It’s beating the other dividend ETFs already mentioned along with other big names such as the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and the SPDR S&P Dividend ETF (SDY). Its 30-day SEC yield of 4.01% also ranks among the best.
Looking at the portfolio composition, it’s pretty easy to see who the fund has to thank for its strong start. It’s overweight in both financials and energy stocks, two areas that have rallied strongly post-election. Top 10 holdings JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) have all rallied around 20% since September. JPMorgan and Wells Fargo have been steadily raising their dividends post-financial crisis and now yield over 2% each. Citigroup has been more modest with its dividend but tripled it in the second quarter. Moreover, it plans on further tripling its dividend and increasing share buybacks over the next few years. On the energy side, top holdings ONEOK (OKE), Targa Resources (TRGP) and ExxonMobil (XOM) operate in different areas but all provide strong yields.
While dividend ETFs have been strong performers, there’s some concern that conditions are becoming less ideal for continued outperformance. The S&P 500’s P/E ratio is at levels not seen since the financial crisis. Consumer staples and utilities, two of the more traditionally conservative sectors, have seen valuations stretched to levels that haven’t been seen in years. The more compelling factor, though, might be the Treasury curve. The 10 year Treasury yield has jumped more than 100 basis points since July. Dividend ETFs that yield around 3% looked particularly attractive with a 10 year Treasury at 2.4% and a one year Treasury at 0.5%. With 10 year Treasuries now at around 2.5%, that yield advantage much less significant.
A three month lifespan isn’t enough to judge the possible long-term success of the Core Dividend ETF but initial signs are encouraging. The portfolio looks to be smartly constructed and its 4% yield is a differentiator if it can be maintained without pushing the boundaries on risk. It’s still too early to deem this fund a buy but it’s worth keeping an eye on.
David Dierking is a freelance writer focusing primarily on ETFs, mutual funds, dividend income strategies and retirement planning. He has spent more than 20 years in the financial services industry and his background includes experience in investment management, portfolio analytics and asset/liability management at both BMO Financial Group and Strong Capital Management.
He has written for Seeking Alpha, Motley Fool, ETF Trends and Investopedia and was also included in the panel for ETFReference.com’s “101 ETF Investing Tips from the Experts”. He has a B.A. in Finance from Michigan State University and lives in Wisconsin with his wife and two daughters.