REGL: a heavy dividend growth ETF in finance

This series of articles on Dividend ETFs aims to assess products with respect to the relative past performance of their strategies and measures of the quality of their current portfolios. As holdings and weightings change over time, I post updated reviews as needed.

REGL strategy and portfolio

The ProShares S&P Midcap 400 Dividend Aristocrats ETF (REGL) has been tracking the S&P MidCap 400 Dividend Aristocrats index since 03/02/2015. He owns 50 stakes, a payout yield of 2.57% and total expense ratios of 0.40%.

As described by ProShares in the prospectus, qualifying companies must be included in the S&P Midcap 400 Index and have increased their dividend payouts each year for at least 15 years. The index contains a minimum of 40 equally weighted stocks with a limit of 30% for each sector. If less than 40 stocks meet the rules, companies with a shorter history of dividend growth will be included. The Index is reconstituted once a year and rebalanced quarterly.

The fund invests exclusively in companies based in the United States. The top 10 holdings, listed below, weigh 22.1% of the asset’s value. There is no position with a weighting greater than 2.6%, so the risk associated with individual stocks is low.

The heaviest sector is finance (28%), followed by industry (21%) and public services (20%). The other sectors are below 11%. Relative to the parent S&P 400 index (MDY, IJH, IVOO, SPMD), REGL is overweight financials, utilities, materials and consumer staples. It is underweight real estate and consumer discretionary, and ignores energy, health care and technology.

Graphic: author

REGL is close to its parent index in valuation:

Data: loyalty

Performance

Since its inception in February 2015, REGL has lagged the S&P 500 (SPY) by around 3 percentage points in terms of annualized return, but it is slightly ahead of the S&P 400 mid-cap in terms of yield and beats it in terms of risk-adjusted performance (Sharpe report).

Data calculated with Portfolio123

The following graph represents the net worth of $ 100 invested in REGL and SPY since REGL’s inception.

Graphic: author

REGL outperformed SPY in 2016-17, it was almost tied until Q3 2019 and then it started to fall behind.

Compare REGL to a benchmark strategy based on dividend and quality

In previous articles, I have shown how three factors can help reduce risk in a dividend portfolio: asset return, the Piotroski F-score, and the Altman Z-score.

The following table compares REGL since its inception with a subset of the S&P 500: stocks with above-average dividend yields for their respective indices, above-average ROA, good Altman Z-score, and good Piotroski F -score. It is rebalanced annually to make it comparable to a passive index.

Past performance is no guarantee of future returns. Data source: Portfolio123

REGL is behind on the dividend and quality subset. However, the REGL return is real, while the performance of the subset is hypothetical. My Core Portfolio contains 14 stocks selected from this subset (more info at the end of this article).

REGL scanning with quality metrics

REGL owns 50 stocks, 5 of which are risky relative to my metrics. In my portfolio reviews, risk stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or questionable Altman Z-score, excluding financials and l real estate where these metrics are less relevant. Here, risky stocks weigh around 10% of the value of the assets, which is acceptable.

According to my calculations, the REGL quality is similar to that of the benchmark (weighted average metrics are reported in the following table). The aggregate ROA is a bit better, while the aggregate Altman and Piotroski scores are a bit lower.

To take with

REGL is a dividend fund holding 50 dividend growth stocks in the S&P 400 Mid-Cap Index, with an equal weight methodology. It is overweighted in financials (28%) and to a lesser extent in industrials and public services (around 20% each). The three main sectors of activity are gas utilities, insurance and banking. Despite a very different sector structure, REGL is close to its parent index in terms of valuation, quality and total return. Maximum drawdown and historical volatility indicate lower risk, resulting in a better Sharpe ratio. However, mid caps have lagged behind the S&P 500 in recent years. In summary, REGL may be a good choice for passive investors seeking dividend growth who want some diversification outside the usual large cap universe. For greater transparency, part of my dividend-focused equity investments are split between a passive ETF allocation (REGL is not one of them) and my actively managed stability portfolio (14 stocks), disclosed and updated. day in Quantitative Risk & Value.