ProShares S&P MidCap 400 Dividend Aristocrats ETF (BATS:REGL) is a smart-beta fund designed to track the performance of equally-weighted mid-size U.S. companies that managed to achieve at least fifteen consecutive years of DPS increases (with caveats).
I reviewed the ETF in July 2021, pointing out that its equity mix had no strong growth or value tilt, quality was far from ideal given only ~68% allocation to stocks with excellent Quant Profitability grades, and highlighting that its yield and dividend growth were robust, though fees were a bit elevated. It should be noted that the 40 bps expense ratio is still a bit higher compared to the U.S. equity asset class median.
Since then, the fund has been rebalanced a few times and reconstituted in January 2022, in line with the methodology of its underlying index. Today, I would like to provide an in-depth review of the changes its portfolio underwent, paying due attention to additions & deletions, and current factor exposure in order to arrive at a conclusion about whether this dividend growth investment vehicle is worth considering amid persistent inflation and rising interest rates.
As of May 6, REGL was long 48 equities, which is much lower compared to 55 in July last year. A string of removals is to blame. While the fund has added just three companies to its portfolio, 10 were ousted. For example, REGL no longer has exposure to the following names,
At the same time, just three stocks were added,
In sum, most additions and deletions were triggered either by capital appreciation or depreciation of the respective stocks, not by dividend cuts or other reasons.
REGL selects the most resilient dividend payers from the S&P 400 index, which is supposed to represent the U.S. mid-cap equity echelon. Expectedly, its portfolio is exposed to all the issues inherent to mid-size companies, principally in terms of quality (lower margins, weaker returns on capital), though the dividend growth screen alleviates that slightly. In my July 2021 article, I highlighted that just ~68% of the fund's net assets were parked in high-quality stocks (an at least B- Profitability grade), while I prefer no less than an 80% allocation when it comes to dividend funds. What I see now is a sheer disappointment. That figure has dropped to 40%. Of course, it should not be regarded as a Sell signal since ~44% have C (+/-) ratings which means their profitability is more or less on par with the respective sectors' medians, which I regard as acceptable for dividend-paying companies, and just ~16.4% have worrisome ratings of D- or lower like Spire (SR); however, it still deserves attention and further research.
Additionally, I would not say that REGL is perfectly positioned for an environment where cheaper stocks continue shining; its allocation to companies with at least B- Valuation rating is below 30%, on par with the July level. At the same time, the share of those trading at a steep premium to the sectors like Carlisle Companies (CSL) has risen sharply, from ~37% to almost 50%. I highlight this as a risk worth bearing in mind.
It should be noted that 35 stocks (73% of REGL's net assets) have at least B- Dividend Safety grade. With surfeit cash flow and low payout ratios, CSL is a nice example. The Yield grade, however, is a disappointment as just ~36% earned no less than a B- rating; this is consistent with the fund being overweight relatively expensive stocks.
The scatter plot below summarizes forward yields and the 3-year DPS compound annual growth rates.
Approximately 66% of the holdings have 5-year CAGRs above 5%, while ~40% yield at least 3%.
The ETF itself has a dividend yield of 2.7%. Not a blockbuster level, certainly unable to beat the current level of inflation; still, this yield is expectable for rather expensive stocks picked in accordance with the strict rules of dividend growth investing. For better context, NOBL is offering only 2%; REGL's and NOBL's standardized yields are on par at the moment: 1.99% and 1.86% as the latter has a lower expense ratio.
But where REGL beats NOBL easily is short-term dividend growth. I believe this is the ETF's essential advantage.
The table below illustrates the performance of REGL compared to a few selected peers including the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), SPDR S&P MidCap 400 ETF (MDY), and IVV over the May 2021 - April 2022 period. Overall, the return is clearly soft, ~(3)%, though a bit better compared to the S&P 400-tracking fund. NOBL is the best in this cohort, with a CAGR of over 3% (anyway, a sluggish start for 2022 has taken its toll). The silver lining here is that REGL had the lowest volatility in the group, manifested in an 11.8% standard deviation.
Its return YTD is marginally better compared to the group, though its exposure to relatively overvalued companies likely hindered it from delivering even small gains. For better context, I have also added the Invesco S&P 500 Pure Value ETF (RPV) which represents the deeply undervalued companies from the upper echelon. Despite the bear party on the Street, it has been chugging along.
So, is REGL a fund worth considering amid sticky inflation and a stagflation risk? I believe it should be regarded as more of a long-term income growth vehicle given its outstanding dividend growth credentials discussed above. At the same time, large exposure to overvalued mid-caps is simply worrisome. Quality is yet another risk worth paying attention to. Thus, I maintain the Hold rating.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.