Global exchange-traded fund provider First Trust has launched a UK-listed smart beta exchange-traded fund targeting US-listed dividend-paying stocks. As of 18 May 2016 the trailing 12-month dividend yield of the fund’s underlying index is 4.06%.
The First Trust US Equity Income UCITS ETF (UINC) invests in dividend-paying US companies while maintaining a quality tilt by excluding stocks based on leverage and free cash flow ratios.
Listed on the London Stock Exchange, the First Trust US Equity Income UCITS ETF (UINC) tracks the performance of the NASDAQ US High Equity Income Index, a modified value-weighted index designed to objectively select dividend-paying stocks from the NASDAQ US Benchmark Index.
To be eligible for inclusion in the index, the companies must meet certain balance sheet requirements and exhibit the ability to increase dividends. Stocks in the bottom 20% by return on assets are automatically excluded. Furthermore, companies are required to maintain a long term debt to asset ratio less than 75%, a three-year dividend payout ratio less than 90%, and positive free cash flow. Eligible securities that pass the above screens are selected for inclusion and are weighted by “net income minus dividends paid” or “plough back”, subject to a maximum weight of 3%.
The index stocks are rebalanced and reconstituted semi-annually. The index is randomly divided into six separate sub-portfolios, each of which receives 16.6% of the total index weight. Each sub-portfolio is rebalanced and reconstituted on a separate semi-annual schedule so that one sub-portfolio is rebalanced each calendar month. The sub-portfolios are rebalanced to their ideal weights of 16.6% once a year in December.
As of 18 May 2016 the index contained 104 securities. The index is primarily exposed to the consumer discretionary (15.6%), industrials (12.6%), financials (12.4%), information technology (11.9%) and utilities (11.7%) sectors.
The fund has a total expense ratio of 0.55%.
Locally the fund will be competing against several ETFs that also target US dividend paying firms while applying a quality-screen. These include the:
iShares MSCI USA Dividend IQ UCITS ETF (QDIV)
This ETF provides a direct investment into equities which have higher than average dividend yields and which have track records for consistently paying dividends and the capacity to sustain dividend payments. The 12 month distribution yield of the fund is 2.50%. As of 19 May 2016, there are 126 holdings in the fund of which the largest constituents are Exxon Mobil (5.4%), Johnson & Johnson (5.3%), Microsoft (4.5%) and AT&T (4.2%). TER – 0.35%.
Source FTSE RAFI US Equity Income Physical UCITS ETF (DVUS)
The ETF utilises a proprietary methodology from Research Affiliates, a leader in smart beta and asset allocation, to invest in high-dividend-paying stocks that have been screened to favour sustainable income. It then weights the constituents by the product of their dividend yield and RAFI Fundamental weight, which is based on four fundamental measures of the company’s size rather than its market capitalisation. As of 19 May 2016 the fund holds 174 constituents of which the largest are Wells Fargo (4.7%), Exxon Mobil (4.6%), Chevron (4.2%), Pfizer (3.3%) and Walmart (2.9%). TER – 0.35%.
SPDR S&P US Dividend Aristocrats UCITS ETF (SPYD)
The fund tracks a portfolio of stocks from the S&P Composite 1500 Index that have boosted their dividends for a minimum of 20 straight years. The dividend yield of the underlying index is 2.85%. Although the hurdle rate for inclusion is 20 years consecutive dividend increases, the average of the fund’s underlying index is actually 35 years of consecutive increases, and eight constituents have acquired over 53 consecutive years of dividend increases. As of 19 May 2016 the fund has 107 holdings of which the largest constituents are HCP (2.7%), AT&T (2.0%), and Chevron (1.8%). TER – 0.35%
There are several US-listed ETFs that apply similar methodologies to a range of US dividend paying equities. These include the:
FlexShares Quality Dividend Index Fund (QDF)
Schwab US Dividend Equity ETF (SCHD)
ProShares S&P 500 Aristocrats ETF (NOBL)
WisdomTree US Quality Dividend Growth Fund (DGRW)
First Trust NASDAQ Rising Dividend Achievers ETF (RDVY)