With today's launch of the iShares "quality-dividend" suite, the Canadian market leader in exchange-traded funds has expanded its already extensive repertoire of ETFs with dividend-driven strategies.
Of necessity, to avoid the "yield trap" of companies whose dividend yields reach lofty heights because the stock price has plunged, all dividend strategies require screening for quality. So it is for the five newest ETFs sponsored by BlackRock Asset Management Canada Ltd.
Branded as the iShares Core MSCI quality-dividend ETFs, they fall into the strategic-beta camp, in that they track rules-based indexes. The Canadian, U.S. and Global ETFs opened for trading today on the Toronto Stock Exchange, and currency-hedged versions of the latter two are scheduled to make their trading debut on June 16. (See table.)
The common theme among all five new offerings is creating portfolios of high-quality companies with above-average and sustainable dividend yields. The process involves screening for factors such as return on equity, earnings variability, debt to equity, and recent 12-month stock-price performance. The goal is to exclude companies that pay above-average dividends but whose potentially deteriorating fundamentals could lead them to reduce or eliminate dividends.
The maximum weight per issuer is capped at 10% for the Canadian dividend ETF, and 5% for the non-Canadian ones. The indexes that the five ETFs track are rebalanced semi-annually in May and December. All the indexes exclude real estate investment trusts.
Once the two new currency-hedged ETFs start trading, BlackRock will manage a total of no less than 15 ETFs investing in dividend-paying common shares, plus another two that invest primarily in preferred shares. With the exception of the actively managed Dynamic iShares ETFs launched n January, the rest of the iShares dividend ETFs pursue rules-based strategies.
Does an ETF company that already offers seven common-share dividend ETFs with smart-beta strategies need another five? Perhaps. One reason might be the mostly lacklustre performance by iShares ETFs in this genre of investing. Of the company's six distinct common-stock dividend mandates with at least a three-year history, all except the 3-star rated iShares S&P/TSX Canadian Dividend Aristocrats Index (CDZ) have a below-average Morningstar Rating for risk-adjusted past performance.
Whether the new suite of dividend ETFs will be stronger performers remains to be seen, of course. But what the new ETFs certainly offer is price competition, both externally and within the BlackRock line-up itself.
Management fees, which cover most operating expenses, are 0.10% for the new Canadian dividend strategy, and 0.14% and 0.20% respectively for the U.S. and global ETFs. There is no additional fee for the two currency-hedged ETFs. To the extent that BlackRock ETFs may be used as underlying holdings, there will be no duplication of fees.
These price points give the new ETFs lower fee hurdles to clear than has previously been the case at BlackRock. For example, the management fee of the new Canadian dividend ETF is only half of the 0.20% that iShares S&P/TSX Composite High Dividend Index (XEI) charges. Likewise, the new U.S. dividend ETF charges only half of the 0.30% management fee of iShares U.S. High Dividend Equity Index (XHU).
BlackRock's latest expansion will bring its total number of ETFs to almost 120, far more than any other Canadian provider. Though a large line-up is justified for a company with a market-leading $55.7 billion in assets and 44% market share (as of April 30), this abundance of choice is cumbersome for investors to sort through.
Since the five new dividend ETFs have been anointed with the "Core" label that BlackRock employs to identify low-cost building blocks for portfolios, they clearly figure into the company's longer-term product strategy. So too, do the Dynamic iShares ETFs that are less than six months old. However, several of BlackRock's higher-cost dividend ETFs with poor relative performance would seem to be logical candidates to be terminated or merged.
| ETF | Symbol | Mgmt fee (%) | ||
| iShares Core MSCI Canadian Quality Dividend Index | XDIV | 0.10 | ||
| iShares Core MSCI US Quality Dividend Index | XDU | 0.14 | ||
| iShares Core MSCI Global Quality Dividend Index | XDG | 0.20 | ||
| iShares Core MSCI US Quality Dividend Index (CAD- Hedged) | XDUH | 0.14 | ||
| iShares Core MSCI Global Quality Dividend Index (CAD-Hedged) | XDGH | 0.20 | ||
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| Source: BlackRock Asset Management Canada Ltd. | ||||
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