An Outstanding Option for Exposure to U.S. Dividend-Paying Stocks
A broadly diversified portfolio and a contrarian rebalancing approach should give the fund an edge.
WisdomTree U.S. LargeCap Dividend ETF (DLN) is an outstanding option for exposure to U.S. large-cap stocks. Its cost advantage relative to category peers in combination with its contrarian rebalancing approach should help it outperform the Russell 1000 Value Index over the long term. Because of its cost advantage relative to peers, under our enhanced ratings framework, we are upgrading its Morningstar Analyst Rating to Silver from Bronze.
The fund fully replicates the WisdomTree U.S. LargeCap Dividend Index. The index is designed to provide exposure to large-cap dividend-paying U.S. stocks. The index screens the top 300 largest stocks by market cap from the WisdomTree Dividend Index, which includes most U.S.-listed dividend-paying stocks. Qualifying stocks must have an expected regular cash dividend, a market capitalization greater than $100 million and meet trading liquidity requirements. The strategy weights each constituent by the value of dividends it expects to pay over the next year, relative to the aggregate value of all expected dividends for stocks in the portfolio. The portfolio is made up of about 283 stocks. The cumulative weighting of stocks with weights greater than 5% is capped at 50% of the total portfolio. Sector weightings are capped at 25% of the portfolio. The result is a well-diversified portfolio of large-cap, dividend-paying companies.
When the fund rebalances each year, it increases its exposure to stocks that have become cheaper relative to their dividends and trims positions that have become more expensive. This contrarian rebalancing approach should help it benefit from trimming positions in relatively richly priced names and reallocating to those that look fundamentally cheaper. This should give it an edge versus the market-cap-weighted Russell 1000 Value Index over the long term.
High-yielding stocks can be risky because they usually pay out an above-average share of their earnings in the form of dividends. That leaves them with a smaller buffer to preserve dividend payments should earnings fall, making them prone to dividend cuts. However, this fund is broadly diversified and skews toward larger and more stable names, so a few dividend cuts shouldn’t hurt returns.
The fund’s expense ratio is 0.28%, materially lower than the 0.85% average charged among all funds in the category. That said, it is a multiple of the toll taken by its least-expensive dividend index-tracking peers.
This fund is subadvised by a team at Mellon. The team has been relatively stable, and Mellon has taken steps to improve its execution and trading. But it does not stand out from other teams and earns an Average People Pillar rating.
Karen Wong, Richard Brown, and Thomas Durante share responsibility for this fund. Wong is head of Mellon’s index portfolio management, which includes both equity and fixed-income strategies. Brown and Durante are co-heads of equity index portfolio management at Mellon. The two oversee the execution of index-tracking strategies for both domestic and international equity strategies.
Analysts support these managers through various tasks like identifying index changes and handling corporate actions. However, the team is still smaller than other asset managers that run index-tracking strategies, so personnel turnover is more likely to impact operations.
Mellon merged three arms of its asset-management business in January 2018 and consolidated the trading operations from each unit into a single desk. This expanded the team’s trading capabilities and expertise. It also has access to international trading desks that can lead to lower transaction costs in foreign markets. Overall, its index-tracking performance should be comparable to that of larger asset managers.
This fund spins a well-diversified portfolio of dividend-paying U.S. large-cap stocks, which should help it deliver and sustain an attractive yield without taking too much risk. It rebalances into stocks as they become cheaper relative to their dividends, which contributes to its value tilt. This should give it an edge versus its market-cap weighted benchmark, which naturally apportions more of its portfolio to stocks as they become more expensive. A broadly diversified portfolio and a contrarian rebalancing approach should give the fund an edge versus the Russell 1000 Value Index over the long haul. These considerations support an Above Average Process Pillar rating.
The fund tracks the WisdomTree U.S. LargeCap Dividend Index. This index selects the 300 largest companies by market cap from the WisdomTree Dividend Index, which includes most U.S.-listed dividend-paying stocks. Higher-yielding stocks are typically riskier than their lower-yielding counterparts because they pay out an above-average share of their earnings in the form of dividends and have less of a buffer to cushion dividend payments if their business deteriorates. However, this fund is broadly diversified and skews towards larger and more stable names, so a few dividend cuts shouldn’t hurt returns.
Qualifying stocks must have an expected regular cash dividend and market caps greater than $100 million and meet trading liquidity requirements. Stocks do not need a long history of dividend payments to qualify for inclusion. The benchmark weights each constituent by the value of dividends it is expected to pay over the next year, relative to the aggregate value for the portfolio. WisdomTree caps sector weightings at 25% of the portfolio and limits the weighting of its largest holdings. The cumulative weighting of the fund's stocks with greater than 5% weights is capped at 50% of the total portfolio. The portfolio rebalances annually in December.
Despite its fundamental weighting approach, which can lead to above-average turnover, the fund’s turnover has averaged 11% during the past decade, less than half the level of the average large-cap value category fund.
As of May 7, 2020, the fund held 283 stocks, the top 10 of which accounted for about 26% of its portfolio. The largest holding, Microsoft (MSFT), accounted for 4.8% of the portfolio. Top holdings include large dividend-paying companies such as Apple (AAPL), Verizon Communications (VZ), and Pfizer (PFE).
Like other dividend funds, the portfolio’s composition is different from traditional value benchmarks like the Russell 1000 Value Index. It has been consistently underweight financial-services stocks and overweight technology stocks since inception.
The fund’s average market capitalization is more than double that of category peers. This owes to the fact that the fund weights its holdings by the proportion of dividend payments that each firm is expected to make among all dividend-paying stocks, which tilts it toward larger and more profitable stocks. When smaller stocks lag larger stocks, it may present this fund with a performance headwind against most of its peers.
From its June 2006 inception through March 2020, the fund outperformed the Russell 1000 Value Index by 406 basis points on an annualized basis, while experiencing lower risk. Much of this outperformance can be attributed to the fund's overweight position in the consumer defensive and healthcare sectors and underweight position in financial-services stocks as compared with the Russell 1000 Value Index.
The fund ranked in the top 2% of the large-value category over the trailing 10 years through March 2020, outperforming the category average while exhibiting slightly lower volatility. Since inception in June 2006 through March 2020, the fund also has tended to hold up better than most of its category peers in difficult markets, as evidenced by its lower downside capture ratio. This owes to its larger market-cap bias.
This portfolio is always fully invested, which helps its category-relative performance during bull markets but could hurt during bear markets.
Venkata Sai Uppaluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.