VanEck’s latest ETF targets durable dividends

Nov 1st, 2018 | By | Category: Equities

VanEck has launched the VanEck Vectors Morningstar Durable Dividend ETF (DURA US) on NYSE Arca, providing exposure to high dividend US companies with strong financial health and attractive valuations.

Ed Lopez, Head of ETF Product with VanEck.

Ed Lopez, Head of ETF Product with VanEck.

The fund tracks the Morningstar US Dividend Valuation Index which targets financially strong companies with a higher probability of sustaining dividend payments.

The index methodology screens the parent Morningstar US Market Index – consisting of around 97% of the total market cap of the US equity market – for firms that have paid a dividend in the previous twelve months.

Securities must also be assigned a fair value estimate by Morningstar’s Equity Research Team. The team currently provides coverage of roughly 700 US stocks.

The index selects securities in the top 50% of the remaining universe by their trailing 12-month dividend yield.

Any company with a “Distance to Default” score in the bottom half of their peer group is eliminated. This proprietary Morningstar metric measures a firm’s solvency levels through a combination of market and company-specific analysis, in which company liabilities are viewed as a call option on the value of assets. In this case, a default is expected to occur if liabilities (the strike price) outweigh the firm’s assets. Because leverage is inherent to their business model, financial services stocks are judged against their sector, while all other companies are measured against the broad equity universe.

Finally, Morningstar excludes any firm with a share price to fair value estimate ratio that lands in the 30% most overvalued in the overall eligible universe.

Constituents are weighted according to the available-dividend model: Dividend per share is multiplied by the number of shares that can be purchased (float). According to Morningstar, this approach retains the primary benefits of market-cap weighting (low turnover and scalable investment capacity) while also maximizing yield. Individual securities are capped at 5% at each semi-annual rebalancing and reconstitution.

Ed Lopez, Head of ETF Product with VanEck, commented, “Traditional methods of screening dividend paying companies generally rely on backward-looking data, such as a company’s history or magnitude of past distributions. Key features of DURA’s index are Morningstar’s fair value and financial health assessments. After years of very low interest rates and ongoing demand for dividend paying stocks, an important consideration for investors is making sure not to overpay for yield, and the Distance to Default metric helps select companies with the lowest probability of future dividend cuts.”

DURA comes with an expense ratio of 0.29%.

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