Skip to Content
ETF Specialist

Hidden Quality in Dividend ETFs

Your dividend ETF might have another trick up its sleeve: efficient exposure to the quality and value premiums.

Mentioned: , , , ,

Interest in quality investing has heated up in recent years, triggering the release of new quality-oriented exchange-traded funds. Several respected academics have released papers that aim to quantify quality/profitability's role as a predictive metric. What are arguably the three most important reports have come in quick succession: "Quality Minus Junk" by Clifford Asness, Andrea Frazzini, and Lasse Pedersen; "The Other Side of Value: The Gross Profitability Premium" by Robert Novy-Marx; and "A Five-Factor Asset Pricing Model" by Eugene Fama and Kenneth French. Their findings are consistent--profitable (high-quality) firms outperform unprofitable firms over time. However, do investors need pricier ETFs that target quality? As it turns out, there's an even cheaper way to access the quality (and sometimes value) premiums: through a dividend ETF, the old stalwart.

Research Background
Novy-Marx's research shows that profitable firms, as defined as those with high relative gross profits/assets, outperform unprofitable firms. He also found that this ratio is about as successful as book/market as a predictor of future returns. Investors often use metrics like net earnings and return on equity to quantify profitability, but Novy-Marx's research suggests that "purer" accounting measures better represent true profitability by not penalizing firms for engaging in research and development, advertising, or other activities that reduce net earnings today but boost them in the future.

Abby Woodham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.