Investment Thesis
We're all familiar with the S&P 500 Dividend Aristocrats - an exclusive group of U.S. large-cap stocks that have raised their dividends for a minimum of 25 consecutive years. While the large caps have lagged the S&P 500 over the years, the same isn't true for the mid-cap Aristocrats. Producing better total and risk-adjusted returns than the S&P MidCap 400 Index, the ProShares S&P MidCap 400 Dividend Aristocrats ETF (BATS:REGL) is a good option for those looking to diversify by cap size. As will be explained, though, just don't set it and forget it for too long.
ETF Profile And Methodology
REGL tracks the performance of the S&P Midcap 400 Dividend Aristocrats Index, whose constituents require at least 15 years of consecutive dividend growth. The Index is re-evaluated each January with a 30% cap placed on each sector along with a minimum of 40 holdings. Rebalancing to an equal weight is done in January, April, July, and October.
REGL's expense ratio is 0.41% and currently has about $1 billion in assets under management. Over the past five years, REGL's dividends have grown at an annualized 16.48%, and the ETF has a trailing dividend yield of 1.96%. However, given its turnover rate of 32%, the remainder of the statistics presented will be weighted average to its current constituents.
The ETF is mainly centered around Financials, Industrials, and Utilities, which comprise 64.09% of the fund. The primary industries include Regional Banks (11.16%) and Property & Casualty Insurance (7.31%) within the Financials sector. The Industrials sector includes Specialty Industrial Machinery (7.19%) and Tools and Accessories (3.68%). Finally, Utilities include Regulated Electric, Gas, and Water (12.53%) and Diversified Utilities (3.57%).
Source: Created By Author Using Daily Holdings Data From ProShares
REGL has 55 companies across 34 industries, with allocations ranging from 1.70% to 1.97%. The top ten are shown below.
Source: ProShares
REGL Performance History
The Index launched in early 2015, but S&P Dow Jones Indices provides additional backtested data. The graph below shows that the Aristocrats have outperformed the Value and Growth versions of the S&P MidCap 400 Index over the last ten years.
Source: S&P Dow Jones Indices
As for actual performance since March 2015, again, we see the Aristocrats perform well, especially on risk-adjusted return measures like the Sharpe and Sortino ratios. The following chart includes fees; REGL has an expense ratio of 0.41%, while Vanguard charges 0.15% to track its Midcap 400 Value and Growth Indexes.
Source: Portfolio Visualizer
The risk statistics above are what many expect from the Aristocrats - lower drawdowns, lower total risk (as measured by standard deviation), and better risk-adjusted returns. ProShares discusses the hallmarks of consistent dividend growth in their report on building resilient dividend portfolios.
Source: Dividend Growth: A Strategy for Building Resilient Portfolios
REGL Analysis
Dividend Yield & Growth
My calculations show REGL's forward dividend yield is 2.23% based on May 4, 2021, prices. This figure would equate to a one-year forward dividend rate of $1.646, or a 13.84% increase over the last 12 months - consistent with its historical growth rate but lower than the four-year weighted average yield of 2.70%. Higher prices in the Insurance and Regional Banking industries have pushed down yields. For example, UMB Financial (UMBF) and American Financial Group (AFG) have increased by over 40% YTD and doubled in the last year. Although these Aristocrats are solid performers, it may be wise to wait for a pullback while remaining invested in a lower-cost market fund.
Source: Created By Author Using Data From Seeking Alpha
As expected, the constituents have an excellent track record for growing dividends. I have calculated this figure to be 26.43 years. The three- and five-year growth rates are 6.73% and 6.85%, respectively, while the net payout ratio is 43%. While not as impressive as that of the Rising Dividend Achievers, it's still acceptable. The likelihood of these companies maintaining and growing their dividends is high.
Volatility
Over the long run, REGL may be considered a low-volatility ETF. Recall from the graphs above that its standard deviation and drawdowns are slightly lower than the MidCap 400 Value and Growth ETFs. However, this is not always advantageous. Often, these ETFs provide only minimal protection on the downside and miss out on market upswings. I summarized the poor performance of low-volatility ETFs in my article on Kevin O'Leary's OUSA, and REGL was not immune from this effect either. In the first three months of 2020, REGL outperformed the iShares Core S&P MidCap ETF (IJH) by 5.17% (-24.53% vs. -29.70%). However, in the 13 months that followed, REGL underperformed by 24.35% (67.72% vs. 92.07%).
The following chart shows the weighted-average betas of REGL's top ten industries. There are some high-beta industries in there, such as Regional Banks and Specialty Industrial Machinery. However, the majority are under 1, indicating the fund is less volatile than the market. While not a concern today, I believe it's worth keeping an eye on if asset prices start to tumble.
Source: Created By Author Using Data From Seeking Alpha
Investment Recommendation And Conclusion
The S&P MidCap Dividend Aristocrats Index has a good track record of producing better risk-adjusted returns than its Value and Growth counterparts. I like the strong dividend growth and consistency metrics, and while the yield may be small, I view this as a trade-off with safety - payout ratios are below 50% for a majority of companies.
My concern with the Aristocrats is their tendency to underperform after corrections. I would also be hesitant to invest based on the price momentum of some of its largest holdings in the Regional Banking and Insurance industries. Trading near their 52-week highs, I think the fund is due for a pullback. If this occurs, I would recommend REGL until a subsequent market correction, in which case, it would be prudent to switch to a low-cost market fund like IJH.
