WisdomTree U.S. Quality Dividend Growth Fund ETF (DGRW -0.35%) is an exchange-traded fund (ETF) that uses dividends as a main criterion for picking its holdings. But don't think that makes it a dividend-focused ETF.
This ETF highlights why it is so important to understand what an ETF is doing before you assume that its name accurately describes the purpose of the fund. Here's what you need to know before you buy this ETF for the wrong reason.
One big symptom of WisdomTree U.S. Quality Dividend Growth ETF's problem
SPDR Portfolio S&P 500 High Dividend ETF (SPYD -0.70%) has a yield of roughly 4.4%. WisdomTree U.S. Quality Dividend Growth ETF's yield is 1.5%. Very clearly, WisdomTree U.S. Quality Dividend Growth ETF isn't trying to maximize dividend yield.
The Vanguard Dividend Appreciation ETF (VIG -0.18%) has a yield of nearly 1.8%. So when it comes to growth, WisdomTree U.S. Quality Dividend Growth ETF isn't living up to the yield offered by a dividend growth ETF, either.
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This is an early sign that WisdomTree U.S. Quality Dividend Growth ETF might not be the dividend exchange-traded fund that its name implies. Or, to be fair, a quick read of the name might mislead you to believe it because, in reality, its name is very descriptive once you dig into the story a little deeper.
To set the stage just a little, SPDR Portfolio S&P 500 High Dividend ETF selects the 80 highest-yielding stocks from the S&P 500 index. It is a legitimately yield-focused ETF.
Vanguard Dividend Appreciation ETF tracks the S&P U.S. Dividend Growers Index, which contains stocks with at least 10 consecutive annual dividend increases. And then it cuts out the highest-yielding 25% of the list to avoid buying "yield traps." It is legitimately focused on dividend growth stocks.
Where things get mixed up for WisdomTree U.S. Quality Dividend Growth ETF
According to WisdomTree, "WisdomTree U.S. Quality Dividend Growth Fund seeks to track the investment results of dividend-paying large-cap companies with growth characteristics in the U.S. equity market." To put that another way, a company has to pay dividends to be in the ETF, but dividends aren't the focus of the ETF.
That's further proven by the selection criteria of the WisdomTree U.S. Quality Dividend Growth Index, which is what the ETF is tracking. WisdomTree's quick summary of the index is this:
The WisdomTree U.S. Quality Dividend Growth Index is a fundamentally weighted index that consists of dividend-paying stocks with growth characteristics. The primary starting screening universe for this index is the constituents of the WisdomTree U.S. Dividend Index with market capitalization of at least $2 billion. The Index is composed of the 300 companies in the WisdomTree U.S. Dividend Index with the best combined rank of growth and quality factors. The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three-year historical averages for return on equity and return on assets.
The bold in that quote was added for emphasis. It highlights that there's another index in the mix, since WisdomTree U.S. Quality Dividend Growth ETF merely tracks a subset of the WisdomTree U.S. Dividend Index. According to the methodology of WisdomTree U.S. Dividend Index (or DI for short):
The DI measures the performance of investable U.S.-based companies that pay regular cash dividends on shares of common stock. All of the other Domestic Dividend Indexes, defined below, are derived from the DI.
So, effectively, the only material dividend requirement for the WisdomTree U.S. Quality Dividend Growth Index is that a stock pay a dividend. And you only really find that out three layers deep into the research process with WisdomTree U.S. Quality Dividend Growth ETF.
What's really going on here is that the ETF uses dividends as an initial quality screen, effectively assuming that dividend-paying companies are financially stronger than non-dividend payers. The really important part of the ETF's approach are the growth and quality factors that get applied to the stock selection process, which includes a look at things like return on equity, return on assets, gross profits over assets, and cash flows over assets.
This ETF's name is descriptive, but perhaps misleading
It wouldn't be fair to say that dividends don't matter in WisdomTree U.S. Quality Dividend Growth ETF's selection process. They are important, even fundamental. But dividends are not the goal of the fund. It uses dividends in an attempt to find quality companies with growth appeal.
If you are looking for a large-cap growth fund, you might want to put WisdomTree U.S. Quality Dividend Growth ETF on your list of candidates. But if you are looking for a dividend fund, well, that's just not what it does, even though a quick read of its name might suggest that it is.
