Willie B. Thomas
We believe we are entering a period where defensive, high-quality dividend stocks will shine. Periods of increased volatility will cause a rotation out of growth and momentum stocks. The question is, how? Play it. Thankfully, there is an ETF for literally everything, and one ETF that tries to capture these types of stocks is FlexShares Quality Dividend Defensive Index Fund (NYSEARCA:QuadrantLong name, but does it live up to its promise? This one is interesting. It’s a passive fund that tracks the Northern Trust Quality Dividend Defensive Index. The index is developed to provide exposure to a high-quality, income-oriented portfolio of US equities with an emphasis on long-term capital growth, targeting an overall beta of 0.5-1.0 times that of the Northern Trust 1250. index.
The fund was launched in December 2012 and currently has over $363 million in assets under management. It has a net expense ratio of 0.37% and a distribution yield of 1.15%. The strategy seeks income and capital growth while limiting volatility. QDEF is designed to hedge against downside risk and participate in market upturns. At least, that’s the hope.
Major holdings: View details
I purposely said this is interesting. What did you notice about the top holdings here?
Flex Share
I don’t get it guys. Apple, Microsoft, Nvidia, Broadcom aren’t exactly “defensive” to me. Nvidia in particular has a lot of momentum and growth compared to the big pullbacks it has had. Since it’s called “Dividend Defense,” I figured some high dividend blue chip non-AI stocks would be at the top. But this appears to be a technology-focused fund.
Sector Composition
What are my thoughts on the holdings? Looking from a sector perspective, we can see the problem. QDEF’s largest sector allocation is Information Technology at 29.1%. Is it defensive? No matter how well-spoken it is, tech is not defensive. It is technology that will be hit the hardest in a market correction. Second is Healthcare at 13.39% and Financials at 11.61%. Healthcare is certainly a defensive sector, but tech and financials less so.
Peer Comparison
QDEF operates in a crowded field of dividend-focused ETFs, but its combination of quality screening and defensive positioning is different. Given its sector composition (which we take issue with being defensive), we would compare this fund to the iShares Core Dividend Growth ETF (German Global) is focused on dividend growth, and there’s an argument to be made that tech companies are the “new” dividend growth story. Looking at price ratios here, QDEF is certainly showing relative strength, but overall it’s underperforming expectations. Is Nvidia behind the recent spike in relative performance? (Hint: it is.)
Stock Chart
Pros and Cons
On the plus side? The focus on long-term capital growth combined with a target beta range could help reduce volatility while delivering positive returns. The key word here is “could.” We think this is unlikely given the sector weightings.
And that’s the downside here. Because this fund leans toward stocks with historically low betas, the question is whether that beta number will hold up and repeat going forward. I’m skeptical. Technology has enjoyed incredibly low volatility and strength, making the betas of many of the big tech stocks low. But that doesn’t mean they’re less susceptible to actual market declines.
Verdict: Not for me
QDEF is a great name, but no matter what screening method I use, I really don’t like the top holdings and sector allocations. None of them seem defensive, and the dividend yields aren’t high enough to be attractive to income-oriented investors. The fund is specifically designed to invest in quality dividend stocks with controlled risk while prioritizing long-term capital growth, but it’s similar to other core equity funds. For those who want to go long only but are less sensitive to broad market fluctuations, I think there are better options than this one.
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