How suite of dividend growth ETFs brings quality to the fore

As market volatility and economic uncertainty test the nerves of investors, CI WisdomTree ETFs offer a core portfolio solution that has outperformed the benchmark

How suite of dividend growth ETFs brings quality to the fore

This article was produced in partnership with CI Global Asset Management.

As uncertainty swirls around the markets and economy, core portfolio holdings that led the way for the past decade are being questioned. Advisors don’t need reminding that past performance is no guarantee of future results, but times of change are discombobulating for the average investor.

As we head toward 2023, inflation is higher and central banks are tightening monetary policy amid weak economic growth. A recession appears increasingly likely. Many companies have responded with layoffs, while consumers are tightening their belts given the higher price of daily purchases. Investors are jittery about the markets because no one really knows what next year has in store or where they should be putting their money. The result is more volatility, which perpetuates the feeling of unease.

Given this environment, Jaron Liu, Director, ETF Strategy, CI Global Asset Management, believes there is a greater emphasis on companies that have solid fundamentals, sustainable earnings and enduring business models. And for those investors looking for diversified large-cap exposure with genuine growth potential, Liu said the CI WisdomTree suite of quality dividend growth index ETFs offer a compelling solution.

The CI WisdomTree U.S. Quality Dividend Growth Index ETF (DGR.B), CI WisdomTree International Quality Dividend Growth Index ETF (IQD.B), and the CI WisdomTree Canada Quality Dividend Growth Index ETF (DGRC) are multi-factor strategies that allow investors to focus on quality, a factor that has traditionally done well during periods of economic contraction.

Liu explained: “Quality companies tend to be characterized as having stronger balance sheets, more stable profitability and lower leverage. That makes them more resilient during periods of higher market volatility.”

Weeding out genuine quality

The CI WisdomTree suite has a unique methodology that considers only dividend-paying companies that have earnings yields greater than their dividend yield, ensuring they can afford to pay out dividends from what they earn through business operations. The funds then apply a quality and forward-looking growth screen featuring metrics such as return on equity, return on assets, and a three-to-five-year earnings growth estimate. This helps screen out highly leveraged companies at risk in the current economic climate.

Liu said: “This is important because we want to ensure that not only are these companies able to grow their earnings, but that the dividends they pay out are actually sustainable over the long term.”

The strategy also applies a weighting based on dividend streams which, combined with the quality and growth screen, prevents it from overweighting overvalued companies. This is central to its success as a lot of core positions within portfolios are often comprised of large-cap, broad-based index funds, which are often market-cap weighted. The CI WisdomTree offerings are designed to overcome this problem and prevent investors getting caught in pricing bubbles.

“An index fund that tracks the S&P 500 would have had nearly 25% alone in the FAANGM stocks at one point last year as well as an overweight to stocks such as Tesla and NVIDIA,” Liu said. “This certainly worked out well over the past decade when interest rates were lower but now that environment has changed, we're starting to see the market favour companies with a greater emphasis on profitability and stability of earnings.”

DGR.B, for example, traditionally has a much lower exposure to tech stocks compared to the benchmark and the tech it primarily holds includes the likes of Apple and Microsoft, which pay dividends and have a history of profitability. DGR.B outperformed the S&P 500 by more than 13% over the last year (as of October 9).

Long-term hold

These ETFs are not just for volatile times like today, as CI GAM views them as long-term core holdings rather than simply a quick trade. They can help an advisor stay disciplined with respect to their client goals by guarding against some of the shortcomings of broad-based index investing.

Liu believes the role of advisors is more important than ever, with clients’ emotions currently running high and some tempted to time the market rather than stick to their investment plan.

“It's important to remind clients that down markets can also lead to different opportunities,” he said. “This might be an ideal time for anyone who wants to reconsider the core positions within their portfolio. And for those who might be looking to move towards a multi-factor approach, CI WisdomTree’s quality dividend growth suite is an excellent option.”

The opinions expressed in the communication are solely those of the author(s) and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.

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