ETFs
5 Top-Rated ETFs for Income
In this special week of earnings content, we’re highlighting five high-yielding exchange-traded funds (ETFs) with a silver or gold medal rating.
For investors looking for funds that generate a steady income stream, funds exposed to companies with the highest dividend yields are an attractive option.
These are products designed to deliver consistent, low-volatility dividends regardless of market conditions.
What Makes a Good High Dividend Strategy for Passive Funds? Today, income investors are increasingly attracted to ETFs because they are easy to buy, transparent and cheap.
Investors should also look for funds offering stable payouts and consistent dividend growth, rather than the highest yield.
For investors in dividend stocks, there is always the possibility of falling into a “dividend trap”, that is, when a high yield masks high debt and profitability problems and a dividend is reduced or removed.
Dividend ETFs attempt to avoid this by balancing current income yield with the long-term capital growth of the portfolio. However, strategies can vary from fund to fund, and it is helpful to understand how often the portfolio is rebalanced and which index the ETF tracks.
Five Highly Rated Dividend ETFs
Below, we list five income ETFs, with silver and gold medalist ratings, each for a different geographic region. We’ve highlighted comments from our analyst team on passive strategies below:
iShares MSCI Europe Quality Dividend ESG UCITS ETF EUR (QDVX)
• Morningstar Medalist Ranking: Gold.
• Morningstar Category: European Equity Income
• Ongoing charges: 0.28%
• Return over 12 months: 3.36%
This strategy yields a Ranking of Morningstar Medalists Golden. Analysis of the portfolio shows that it has maintained an overweight in liquidity exposure and an underweight in volatility exposure relative to its category peers. High liquidity exposure is assigned to stocks with high trading volume, which gives managers more flexibility. Exposure to low volatility is anchored in stocks that have a lower standard deviation of return. This particular ETF is overweight technology by 4.9 percentage points in terms of assets compared to the category average. The portfolio is positioned on 81 securities and is relatively heavy. Of the strategy’s assets, 30.5% are concentrated in the top 10 stocks, compared to a category average of 19.0%. Fees (0.28%) are among the lowest in the category.
SPDR® S&P US Dividend Aristocrats UCITS ETF (UDVD)
• Ranking of Morningstar medalists: Silver
• Morningstar Category: US Income Equity
• Ongoing charges: 0.35%
• Return over 12 months: 2.14%
This U.S.-focused strategy shows a greater presence of mid- and small-cap stocks than its Morningstar Category peers, and the portfolio has maintained an overweight to liquid and quality stocks. In recent years, this fund has consistently tilted toward higher-volume stocks than its Morningstar peers. This gives managers greater flexibility during bear markets to sell without negatively affecting prices. In recent months, the strategy has been more exposed to liquidity factors than its direct competitors. The strategy also had a defensive bias.
In terms of performance, the ETF has been poor in the short term but strong in the long term. Over the past five years, the fund has slightly underperformed the category index (a benchmark chosen by Morningstar for the peer group) by 0.36 percentage points, but has outperformed its average peer by 1 .4 percentage points. More importantly, over 10 years, this share class has led the index by 0.75% annualized. It also leads the index with higher risk-adjusted return over the past 10 years. Often, higher returns are associated with more risk. This strategy, however, remained in line with the standard deviation of the benchmark index. In addition to its low cost (0.35%), these factors give it a Medalist rating silver.
L&G Quality Equity Dividends ESG Exclusions UK UCITS ETF (LDUK)
• Ranking of Morningstar medalists: Silver
• Morningstar Category: UK Income Equity
• Ongoing charges: 0.24%
• Return over 12 months: 5.00%
Portfolio analysis of this strategy shows that it has maintained a significant overweight in terms of quality and yield exposure compared to its category peers. It invests in stocks with low leverage and high returns on equity, giving it high exposure to quality. These stocks also tend to be high dividend or buyout stocks. The portfolio – which is spread across 37 stocks and is relatively heavy – is overweight in financials and basic materials compared to the category average by 29.9 and 3.6 percentage points, respectively. This ETF maintains a considerable cost advantage over its competitors, with a price that is in the cheapest fee quintile among its peers (at 0.24%), and earns a Ranking of Morningstar Medalists silver.
Fidelity Global Quality Income ETF (FGQI)
• Morningstar Medalist Ranking: Gold.
• Morningstar Category: Global Equity Income
• Ongoing charges: 0.40%
• Return over 12 months: 2.68%
This strategy yields a Ranking of Morningstar Medalists Golden. Over the past three years, it has beaten the category index by 0.65 percentage points annualized and outperformed the category average by 3.1 percentage points. And more importantly, if we look at the longer term, the strategy has proven to be a winner. On a five-year basis, it led the index by 3.8 percentage points annualized.
The fund’s risk-adjusted performance only enhances its profile. The share class has dominated the index over the past five years. These good risk-adjusted results did not cause difficulties for investors. This strategy took similar risk as the benchmark, as measured by standard deviation.
The portfolio is overweight in the technology and consumer discretionary sectors compared to the category average, by 4.4% and 2.7%, respectively. The least exposed sectors compared to category peers are defensive and financial consumer services. The ongoing charge is 0.40%.
Fidelity Emerging Markets Quality Income UCITS ETF (WOMAN)
• Morningstar Medalist Ranking: Gold.
• Morningstar Category: Global Emerging Markets Equity
• Ongoing charges: 3.62%
This fund maintains a considerable cost advantage over its competitors, being priced in the second-cheapest fee quintile among its peers. The portfolio has allocations to its two main sectors – industrials and basic materials – that are similar to the category. The least exposed sectors compared to category peers are consumer advocacy and communications services; however, the allocations are similar to the category. The portfolio is composed of 179 securities and is diversified among these securities. In its most recent portfolio, 20.2% of portfolio assets were concentrated in the top 10 fund holdings, compared to the category average of 35.5%.
The fund’s long-term history is largely no longer applicable, as it is not necessarily representative of the current strategy. The new team took the reins in March 2022 and, based on their performance so far, they have shown admirable results. For the most recent two-year period, the strategy returned 1.1% through the end of the month, better than its peers’ average loss of 1.7% and loss of 1.0 % of the category index. Accounting for risk, over the past year the strategy had a similar standard deviation, a measure of variation in returns, to that of the benchmark. Morningstar analysts give it a Medalist rating Golden.
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