TDV Combines Technology, Dividend Growth And Equal Weight (BATS:TDV)

This series of dividend ETF articles aims to evaluate products in terms of the relative past performance of their strategies and quality metrics in their current portfolios. As the properties and their weights change over time, I can update the reviews, usually not. more than once a year.

TDV strategy and portfolio

The S&P Technology Dividend Aristocrats ETF (BATS: TDV) which tracks the S&P Technology Dividend Aristocrats Index since 11/05/2019. It has 40 assets, a 30-day SEC yield of 1.47% and an overall cost ratio of 0.45%. Assets under management are still low (about $ 100M) and liquidity is thin.

As described by the S&P Dow Jones Indices, to qualify for the index a company must be in the GICS Information Technology sector or in one of the three internet industries classified in the Communication Services sector. There must also be an increase in dividends each year for at least seven consecutive years and have a 6-month median daily amount of more than $ 1 million. The number of years of dividend increases can be shortened to 6, 5 or 4 years if less than 25 companies are eligible. The index is reconstituted annually and rebalanced quarterly with constituents of equal weight.

The fund invests exclusively in U.S. companies, in all segments of the size.

The three heaviest industries were IT services (27.3%), semiconductors (25%) and electronic equipment (20.6%). Other industries under 10%. Compared to the S&P Technology Select Sector Index (XLK), TDV overweight many electronic devices. It lowers software and hardware by a wide margin.

The top 10 assets, listed in the next table with some standard ratios, represent 27.5% of the asset value. The largest holding has a weight of 3.18%, so the risks associated with individual stocks are small.

Historical performance

The price history is short: the underlying index was launched in October 2019 and the ETF about a month ago. The S&P Dow Jones Indices provides simulated data from 1/31/2014. The next chart compares the TDV underlying index (in blue) with SPY (red) and XLK (green).

Based on underlying indices since 2014, the TDV (simulate) approach retracts the sector benchmark and outperforms the broader market index.

The following chart outlines the actual relative performance since the start of TDV. Once again, TDV is in the middle of two other index funds.

Comparing TDV to a reference strategy

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

The next table compares the TDV since the start of a subset of the S&P 500: stocks with a 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 each quarter so that it can be compared to a passive index.

Past performances are no guarantee of future returns. Data Source: Portfolio123

TDV and this dividend quality benchmark have the same return and risk metrics at this time. However, the ETF’s performance is real and the subset rather hypothetical. My core portfolio holds 14 stocks selected in this subset (more info at the end of this post). Unlike TDV, it covers all sectors.

Scan the current portfolio

TDV has a portfolio of 40 properties. It is cheaper than the sector benchmark XLK in terms of conventional valuation ratios, as reported in the next table. The difference in price / sales ratio is even more impressive.

I scanned the TDV holdings using the quality metrics described in the previous paragraph. I consider risky stocks to be companies with at least 2 red flags in between: bad Piotroski mark, negative ROA, unsustainable payout ratio, bad or questionable Altman Z- score. With these assumptions, only 3 stocks out of 40 are risky and they weigh less than 7% of asset value, which is a good point.

Based on my calculations, TDV has a better aggregate ROA than XLK, but a lower aggregate Piotroski F-score. The difference in the Altman Z-score is not very significant. In summary, the quality is close to the benchmark.

Takeaway

TDV has a portfolio with a minimum of 25 dividend growth stocks in the technology sector (currently 40). The industry weights are very different from the XLK sector benchmark: the fund lowers hardware and software, and overweight IT services, semiconductors and electronic equipment. It follows the same weighting method, which is a guarantee against over -exposure of individual stocks. The TDV is more attractive than the XLK in terms of price, but the quality is the same. The underlying index lacks XLK in a simulation since 2014, and also in the real world since inception (2019). However, it outperformed the S&P 500 in two seasons. TDV’s liquidity is minimal: caution is recommended and limit orders. For transparency, my equity investments are divided between passive ETF allocation (TDV is not part of it) and an actively managed stock portfolio, whose positions and trades are disclosed in Quantitative Risk & Value.