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An Aggressive Quality And Value Dividend Fund

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By Samuel Lee

This article was published in the July 2014 issue of Morningstar ETFInvestor. Download a complimentary copy of ETFInvestor here.

It’s been a little over three years since iShares Core High Dividend (NYSEARCA:HDV) launched. Now that iShares has slashed its fee to 0.12% from a rich 0.40%, this fund is worth another look. As a rough rule, I don’t like to buy U.S. stock exchange-traded funds with expense ratios higher than 0.25%. Thanks to bone-crunching competition among the titans of the ETF industry, there are plenty of good products that charge less than that.

It’s hard to eke out an edge in the U.S. stock market, the major leagues of investing. Even with the best factor funds, the best you can reasonably hope for is an extra percentage point or two of return--risk-adjusted, of course. The fund’s new expense ratio makes it competitive with many passive options and lowers the hurdle for outperformance.

This fund tracks the Morningstar Dividend Yield Focus Index, a basket of 75 high-yield U.S. stocks weighted by their aggregate dividends, a scheme pioneered by WisdomTree. (The ETF research team had nothing to do with its construction.) It is unusual in several respects, the foremost being that some of its key inputs require Morningstar equity analysts’ qualitative judgments.

The main qualitative screen relies on Warren Buffett’s notion of the economic moat: a sustainable advantage that makes life difficult if not impossible for a business’ competitors. A moat allows a business to reap above-market returns on its invested capital. Coca-Cola (KO), with its iconic brand, globe-spanning distribution network, and economies of scale, is a classic example. Morningstar equity analysts assign all stocks they cover a Morningstar Economic Moat Rating: wide, narrow, or none. Wide indicates that a business can reap above-average returns on invested capital for 20 years. None is self-explanatory, and narrow is in between. No-moat

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