Of the more than 100 exchange-traded funds launched since Dec. 1, fewer than 10 have been dividend-focused portfolios. O’Shares and PowerShares, however, introduced international and small-cap domestic dividend ETFs within a few months of each other. The funds have different index providers and rules, but each is aiming at the same market niche: higher yield and lower volatility.
Here are the nuts and bolts of these relatively new dividend ETFs.
O’Shares FTSE Russell International Quality Dividend ETF (ONTL, expense ratio: .48%) is based on a multi-factor index that screens for company quality (as defined by profitability, efficiency, earnings quality and leverage), low volatility and higher yield. It draws from stocks from developed countries outside the United States. Companies are capped at 5% of the index. Launched in March, ONTL has 460 holdings with greatest sector concentration in consumer staples, health care, and industrials. Biggest country holdings are in the U.K., Switzerland, and Japan.
PowerShares S&P International Developed High Dividend Low Volatility Portfolio (IDHD, .30%) is an ETF of 100 stocks that came public on Dec. 1, 2016. The fund is based on the S&P EPAC Ex-Korea Low Volatility High Dividend Index, which tracks developed market stocks in Europe and the Asia Pacific region, excluding Korea. The 300 stocks from the region with the highest 12-month trailing yields form the universe from which the 100 least volatile are selected for the index. Volatility is based on standard deviation of daily local price returns over the trailing 12 months. Largest sectors are real estate, utilities, and financials. Singapore, Australia, and Hong Kong are the top country allocations.
O’Shares FTSE Russell Small Cap Quality Dividend ETF (OUSM, .48%) The small-cap domestic stock portfolio, launched in December, holds 329 issues. The FTSE Russell index underlying this ETF uses the same FTSE factor screens as ONTL, but applied to smaller U.S. stocks. Companies are capped at 3% of the index. Biggest sectors are real estate, consumer discretionary, and industrials.
PowerShares S&P SmallCap High Dividend Low Volatility Portfolio (XSHD, .30%) holds 60 stocks drawn from the S&P Small Cap 600. The selection starts with the 90 top yielding stocks from the base index, with a limit of 10 stocks per GICS sector. These stocks are then ranked by volatility over the prior 252 trading days. The 60 least volatile form the index XSHD tracks. Real estate, financials, and utilities are the largest sectors in the ETF, which was launched on Dec. 1, 2016.
Although O’Shares and PowerShares have introduced similar funds seeking international and small-cap exposure, there are several differences to keep in mind.
The FTSE Russell indexes used by O’Shares have more factors determining their composition than do the S&P Dow Jones benchmarks used in the PowerShares ETFs. Despite greater restrictions, the FTSE Russell-based funds contain much larger numbers of stocks than do the rival SPDJI-based ETFs. Does that extra diversification provide more downside protection? Or does it inhibit performance by diluting the effect of winning positions? We’ll compare these two sets of funds once they have aged a bit more.
You may have noticed the curious designation “ex-Korea” in the SPDJI index underlying IDHD. Even though the International Monetary Fund ranks South Korea as the world’s 11th largest economy, S&P Dow Jones Indices has excluded it from this developed country benchmark. One reason for that may be because rival MSCI excludes Korea from its EAFE index. Korea was an emerging market when MSCI added the country to its EM index in 1992. Investors who use MSCI indexes for EM positions don’t want to double-count Korea in a competing firm’s developed market benchmark.
