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Quality and Dividends: The ETF 1-2 Punch


In a volatile market environment, investors can turn to exchange traded funds that target quality stocks to capture attractive returns over time.

Dividend ETF investors who are seeking stability, along with exposure to the growing U.S. markets, should look to quality instead of chasing after yields. For instance, the FlexShares Quality Dividend Index Fund (NYSEArca: QDF), FlexShares Quality Dividend Dynamic Index Fund (NYSEArca: QDYN) and the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF) are a group of smart-beta ETFs that focus on both quality and dividends. High-quality, yield-focused equity position can potentially act as a return stabilizer for a broader portfolio, mitigate risk in volatile markets and provide higher dividend growth.

These ETFs “may be suited to investors seeking to achieve their income needs while still participating in capital growth through the U.S. equity market,” according to FlexShares.

QDF emphasizes the quality factor where a company’s ability to generate free cash, dividend growth and stability are integral factors. The ETF tries to reflect the performance of the Northern Trust Quality Dividend Index, which holds high-quality income-oriented U.S. companies with a targeted overall beta similar to the Northern Trust 1250 Index, or the parent index. QDF’s quality emphasis implies a safer payout and more room for potential dividend growth. The fund comes with a 3.16% 12-month yield.

On the other hand, QDYN targets companies with an overall beta that is between 1.0 to 1.5 times that of the parent index. The higher beta range means this dividend ETF may exhibit larger swings or volatility, but investors are rewarded with a higher dividend payout. QDYN has a 4.17% 12-month yield.

Additionally, QDEF includes companies with an overall beta that is between 0.5 to 1.0 times that of the parent index. The low beta component may be more suitable for more conservative investors who want less exposure to market volatility, but QDEF has a lower 3.10% 12-month yield.

While not exactly small, these quality dividend ETFs do show relatively low trading activity, so potential investors may want to take precautions to better execute trades.

On the upcoming webcast, The Secret to ETF Trading: Understanding ETF Liquidity, Edward A. Rosenberg, Senior VP and Head of ETF Capital Markets & Analytics at Northern Trust Asset Management, will also dive into how ETF work and the best practices for executing efficient trades.

For instance, despite low activity in the ETF, advisors may consider an ETF’s true liquidity, or the overall liquidity of the underlying holdings as a better indicator. Financial advisors may work with market makers to execute trades in less active ETFs to diminish their impact on market prices.

Advisors who are interested in learning more about best practices for trading ETFs can register for the Thursday, February 18: webcast here.

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