DON: Mid-Cap Dividend ETF Review

Summary

  • DON is a dividend mid-cap ETF with a monthly distribution.
  • 23% of asset value is in financials.
  • Past performance shows no edge over a mid-cap benchmark.
  • Looking for a helping hand in the market? Members of Quantitative Risk & Value get exclusive ideas and guidance to navigate any climate. Learn More »

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This dividend ETF (exchange-traded fund) article series aims at evaluating products regarding the relative past performance of their strategies and quality metrics of their current portfolios. Holdings and their weights change over time: reviews are updated when necessary.

DON strategy and portfolio

The WisdomTree MidCap Dividend Fund (NYSEARCA:DON) has 342 holdings, a distribution yield of 2.64%, and an expense ratio of 0.38%. Distributions are monthly. It has been tracking the WisdomTree U.S. MidCap Dividend Index since 06/16/2006.

As described in the prospectus by WisdomTree, the underlying index selects companies in the top 75% of the market capitalization of the WisdomTree U.S. Dividend Index after the 300 largest companies have been removed. They are weighted annually based on paid dividends (not yields). The fund invests exclusively in U.S. companies, about 71% mid-caps and 29% small-caps.

The portfolio is well diversified: less than 12% is in the top 10 holdings, listed below with some basic ratios.

Ticker

Name

Weight %

EPS growth % ttm

P/E ttm

P/E fwd

Yield %

EVRG

Evergy, Inc.

1.47%

8.27

17.37

17.28

3.74

CLR

Continental Resources, Inc.

1.33%

1401.87

11.83

5.57

1.72

CAG

Conagra Brands, Inc.

1.25%

-11.44

15.07

13.84

3.85

CAH

Cardinal Health, Inc.

1.25%

-190.92

N/A

10.13

3.77

CTRA

Coterra Energy Inc.

1.18%

213.07

12.67

5.71

2.22

OMC

Omnicom Group Inc.

1.11%

33.83

10.47

9.39

4.43

FNF

Fidelity National Financial, Inc. FNF Group

1.07%

7.60

4.63

5.92

4.90

CPB

Campbell Soup Co.

1.01%

19.18

15.00

16.58

3.15

OGN

Organon & Co.

0.99%

-30.09

6.56

6.27

3.33

OGE

OGE Energy Corp.

0.96%

159.85

7.47

17.50

4.56

Ratios from Portfolio123

The top sector is financials with 23% of asset value. Compared to the SPDR S&P MidCap 400 ETF (MDY), DON overweights not only financials but also utilities, materials and energy. It underweights technology, industrials and healthcare. Sector composition may change over time.

Sector weights

Sector weights (chart: author; data: Fidelity)

Past performance

Since inception in Jun 2006, DON is very close to MDY in return and risk metrics. Both funds have the same Sharpe ratio, a measure of risk-adjusted performance. They underperform the S&P 500 (SPY) by less than 1 percentage point in annualized return. The next table shows detailed data.

Total Return

Annual.Return

Drawdown

Sharpe Ratio

Volatility

DON

264.37%

8.42%

-62.08%

0.52

18.55%

MDY

271.97%

8.56%

-55.37%

0.52

18.73%

SPY

312.23%

9.26%

-55.42%

0.62

15.48%

*rebalanced annually. Data calculated with Portfolio123

The next chart compares DON and SPY in the last 10 years. Both ETFs were on par until Q1 2019, then DON started underperforming.

DON vs. SPY

DON vs. SPY (Portfolio123)

In previous articles, I have shown how three factors may help cut the risk in a dividend portfolio: Return on Assets, Piotroski F-score, and Altman Z-score.

The next table compares DON with a subset of the S&P 500: stocks with an above-average dividend yield, an above-average ROA, a good Altman Z-score, a good Piotroski F-score and a sustainable payout ratio. The subset is rebalanced quarterly to make it comparable with a passive index.

Since Inception

Total Return

Annual.Return

Drawdown

Sharpe Ratio

Volatility

DON

264.37%

8.42%

-62.08%

0.52

18.55%

Dividend quality subset

540.17%

12.30%

-41.51%

0.83

14.84%

Past performance is not a guarantee of future returns. Data Source: Portfolio123

DON underperforms the dividend quality subset by 3.88 percentage points in annualized return. However, the ETF performance is real, and this subset is hypothetical. My core portfolio holds 14 stocks selected in this subset (more info at the end of this post).

Scanning DON portfolio

Valuation metrics are a bit cheaper than for MDY, but the difference is not very significant (see next table).

DON

MDY

Price/Earnings TTM

12.43

13.61

Price/Book

2.17

2.27

Price/Sales

1.22

1.29

Price/Cash Flow

10.08

11.71

I have scanned holdings with the quality metrics described in the previous paragraph. I consider that risky stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate where these metrics are less relevant. With these assumptions, 27 stocks out of 342 are risky, and they weigh less than 9% of asset value, which is acceptable.

Based on my calculation, the aggregate return on assets is superior to MDY's aggregate value. Altman Z-score Piotroski F-score are not significantly different. These metrics point to a portfolio quality slightly superior to the mid-cap benchmark.

DON

MDY

Altman Z-score

2.54

2.79

Piotroski F-score

5.8

5.7

ROA% TTM

6.83

5.43

Takeaway

DON holds over 300 U.S. dividend stocks in the mid-cap and small-cap segments. Constituents are weighted based on paid dividends. No holding weights more than 1.5%, so the risk related to individual stocks is very low. However, exposure to financials is high: 23% of asset value. Valuation ratios are a bit cheaper than for the mid-cap benchmark S&P 400 index, and quality metrics are a bit better. DON is very close to the S&P 400 in past performance since inception and behind the large-cap S&P 500.

In summary, DON is close to the mid-cap benchmark on many points. It is not a bad product, but it doesn't seem to have an edge over a simpler and broader index in the same size segment. For transparency, a dividend-oriented part of my equity investments is split between a passive ETF allocation (DON is not part of it) and my actively managed Stability portfolio (14 stocks), disclosed and updated in Quantitative Risk & Value.

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This article was written by

Fred Piard profile picture
14.34K Followers
Data-driven model portfolios and market risk indicators.
Author of Quantitative Risk & Value and three books, I have been investing in systematic strategies since 2010. I have a PhD in computer science, an MSc in software engineering, an MSc in civil engineering and 30 years of professional experience in various sectors. My aim is making simple and efficient quantitative investing techniques available to my followers. Quantitative models can make investment decisions faster, reproducible and emotionless by focusing on relevant information in the middle of market noise. Moreover, models can be refined to meet specific risk tolerance and objectives. 

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I am an individual investor and an IT professional, not a finance professional. My writings are data analysis and opinions, not investment advice. They may contain inaccurate information, despite all the effort I put in them. Readers are responsible for all consequences of using information included in my work, and are encouraged to do their own research from various sources.

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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.

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