Although quality is a popular topic in universities financial department and leading money management firms nowadays, there is no consistent definition of quality sustainable with time. Nevertheless money management firms have created at least 55 ETFs and mutual funds with the word quality in the fund name. As a person who lived more than 30 years in communist country I think it is reflection of capitalism - somebody creates product or service if there is a demand. For example there is a mutual fund which invests in companies which prefer hire gays and lesbians. I wonder how the fund manager can proof that such choice makes economic sense but probably there is demand for such fund. On another hand, fuzzy and opaque quality definitions (within and beyond financial reports of public firms) in finance allows quality funds charge significant fees.
My hypothesis is that dividend growth <DG> patterns of companies can serve as an indicator of good firm quality. In order to check this hypothesis I compared holdings of ETFs with the words quality and dividend in the which invest in US stocks with the latest (December 2015) edition of David Fish's U.S. Dividend Champions list. I found 6 such ETFs created by 3 financial institutes in Morningstar database:
ETF NAME | SYMBOL |
O'Shares FTSE U.S. Quality Dividend ETF | OUSA |
WisdomTree U.S. Quality Dividend Growth Fund | DGRW |
WisdomTree U.S. SmallCap Quality Dividend Growth Fund | DGRS |
FlexShares Quality Dividend Defensive Index Fund | QDEF |
FlexShares Quality Dividend Dynamic Index Fund | QDYN |
FlexShares Quality Dividend Index Fund | QDF |
.
Their combined holdings (as 01/28/2016) are presented in the Table 1.
TABLE 1. Holdings of US Dividend Quality ETFs
Indeed more than 80% of capital invested by these ETFs is in stocks from of David Fish's list.
The other companies from CCC list not included in the ETFs are mostly financial firms (banks, insurers, etc.) probably because some quality metrics such as ROIC are not applicable to them and small-cap companies which might be non-investable for Wall Street.
Of course the result presented in the Table 1 is biased because universe of these ETFs are dividend stocks. Therefore I analyzed 5 ETFs created by 5 financial institutes with the word quality in the title which hold only US stocks:
ETF NAME | SYMBOL |
First Trust RBA Quality Income ETF | QINC |
iShares MSCI USA Quality Factor ETF | QUAL |
FlexShares US Quality Large Cap Index Fund | QLC |
SPDR® MSCI USA Quality Mix ETF | QUS |
PowerShares S&P 500 High Quality Portfolio | SPHQ |
Their combined holdings (as 01/28/2016) are presented in the Table 2 below.
TABLE 2. Holdings of US Quality ETFs
Again about 60% of all holdings of these ETFs are listed in U.S. Dividend Champions tables and they represent more than 80% of capital invested by these ETFs.
I tested the hypothesis for UK there DG culture is also good based on holdings of the following ETFs:
| FlexShares International Quality Dividend Defensive Index Fund | IQDE |
| FlexShares International Quality Dividend Dynamic Index Fund | IQDY |
| FlexShares International Quality Dividend Index Fund | IQDF |
| O'Shares FTSE Europe Quality Dividend ETF | OEUR |
| WisdomTree Global ex-U.S. Quality Dividend Growth Fund | DNL |
| WisdomTree Europe Quality Dividend Growth Fund | EUDG |
| SPDR® MSCI United Kingdom Quality Mix ETF | QGBR |
The results (Table 3) are compared with UK Dividends Champions list completed in Dec. 2015.
Table 3. UK stocks in the quality ETFs holdings (as 01/28/2016)
Again above 55% of holdings of these ETFs are in the UK Dividends Champions list and they represent about 65% of invested capital of these ETs into UK stocks.
Therefore, I think that DG can serve as good indicator of high-quality firm at least in the eyes of mentioned ETFs (and indexes behind) creators. But do your DD before invest even if you agree or please tell me if I'm wrong.
Disclosure: l'm long on some of these CCC stocks and some other stocks (marked SDS in the Tables 1 - 3) with not traditional DG patterns or high yield.