OUSA: Low Yield, High Quality Dividends (BATS:OUSA)

0

gerrey

This series of articles on dividend ETFs aims to evaluate products based on the relative past performance of their strategies and the quality indicators of their current portfolios. As holdings and weightings change over time, updated advisories are posted as needed.

Strategy and wallet

The O’Shares US Quality Dividend ETF (BAT:OUSA) tracks the O’Shares US Quality Dividend Index since 07/14/2015. It has 100 holdings, a payout yield of 1.91% and an expense ratio of 0.48%. Distributions are monthly.

As described on O’Shares websiteOUSA invests in “Ilarge and mid-cap U.S. dividend-paying issuers that meet certain market capitalization, liquidity, high quality, low volatility, and dividend yield thresholds. (…) The high-quality, low-volatility requirements are designed to reduce exposure to high-dividend stocks that have experienced significant price declines”.

Stocks are selected and weighted based on four factors: 1) quality, 2) low volatility, 3) dividend yield and 4) dividend quality. In addition, weight constraints are applied to constituents and sectors. Constituents are also selected for free float (shares available for purchase on the open market) and average daily trading volume. The underlying index is rebalanced quarterly and replenished annually. The strategy was changed in June 2020 to put more emphasis on quality.

The fund invests mainly in the United States (96.46%) and in large and mega-caps (94.6%). Against the S&P 500 (SPY), OUSA is overweight healthcare, consumer discretionary, financials, industrials and consumer staples. It is underweight technology (which is however the heaviest sector in the fund) and communication. It ignores energy, materials, real estate and utilities. The composition of the sector may change over time.

Sector weightings

Sector weightings (graph: author; data: ALPS Advisors)

Valuation metrics don’t look appealing. Price-to-earnings and price-to-cash-flow ratios are comparable to the S&P 500, but price-to-book and price-to-sales are significantly more expensive.

WHERE

TO SPY

TTM Price/Earnings

19.74

19.63

Price/Book

5.89

3.72

Price/Sales

3.08

2.4

Price/cash flow

15.02

14.98

Source: Loyalty

The top 10 holdings, listed in the following table along with some useful ratios, have an overall weight of 39.9%. The largest holdings are less than 5%, so individual stock risks are moderate.

Teleprinter

Last name

lester

EPS growth %ttm

P/E ttm

P/E front

Yield%

MSFT

Microsoft Corp.

4.89%

19.73

25.38

24.14

1.01

HD

Home Depot, Inc.

4.75%

2:47 p.m.

16.96

16.65

2.75

JNJ

Johnson & Johnson

4.37%

3.44

24.36

4:60 p.m.

2.70

SPGI

S&P Global, Inc.

4.18%

31.74

25.79

30.12

0.98

DFP

Pfizer Inc.

4.04%

118.65

9.01

7.08

3.48

AAPL

Apple Inc.

3.77%

18.52

24.90

24.73

0.61

CMM

Marsh & McLennan Cos., Inc.

3.75%

36.57

23.57

23.08

1.51

TRUE

T. Rowe Price Group, Inc.

3.59%

-18.33

10.63

13.23

4.36

M.K.R.

Merck & Co., Inc.

3.33%

198.27

1:43 p.m.

11.87

3.15

MCD

McDonald’s Corp.

3.21%

-11.61

31.41

25.86

2.17

Portfolio ratios123

Past performance

OUSA has underperformed SPY by around 1.7 percentage points in annualized return since its inception in July 2015. Volatility is lower, resulting in a risk-adjusted performance close to the benchmark (ratio of Sharpe). The following table shows detailed data.

Full return

Annual return

Sampling

Sharpe report

Volatility

WHERE

85.05%

8.97%

-31.40%

0.68

13.38%

TO SPY

107.21%

10.70%

-32.05%

0.71

15.65%

Data calculated with Portfolio123

OUSA vs. SPY since its inception

OUSA vs. SPY since its inception (Portfolio123)

In fact, OUSA was almost on par with SPY after the market crash of March 2020, then it lagged in the recovery until the last quarter of 2021. However, it was somewhat more resilient than SPY in the market downturn this year, as shown on the following chart.

OUSA vs. SPY in 2022 so far

OUSA vs. SPY in 2022 so far (Portfolio123)

In previous articles, I’ve shown how three factors can help reduce risk in a dividend portfolio: asset yield, Piotroski’s F-score, and Altman’s Z-score.

The following chart compares OUSA to a subset of the S&P 500: stocks with an above-average dividend yield, above-average ROA, good Altman Z-score, good Piotroski F-score, and of sustainable distribution. The subset is rebalanced annually to make it comparable to a passive index.

Full return

Annual return

Sampling

Sharpe report

Volatility

WHERE

85.05%

8.97%

-31.40%

0.68

13.38%

Dividend quality subset

114.21%

11.22%

-38.04%

0.72

16.16%

PPast performance is not a guarantee of future returns. Data source: Portfolio123

OUSA lags the dividend quality subset by 2.2 percentage points in terms of annualized yield. Please note: the performance of the ETF is real and this subset is hypothetical. My base portfolio contains 14 stocks selected from this subset (more info at the end of this article).

Analyze OUSA with quality metrics

In my ETF reviews, risky stocks are companies with at least two red flags: bad Piotroski score, negative ROA, unsustainable payout rate, bad or questionable Altman Z-score, excluding financials and real estate for which these measurements are less reliable. In the case of OUSA, the only risky stock in the portfolio is Verizon Communications (VZ), which has poor Piotroski and Altman scores. It weighs only 2.19% of the asset value.

By my calculation of the overall quality measures presented in the following table, the quality of the portfolio is higher than that of the S&P 500, as expected. In particular, the weighted average ROA is excellent.

WHERE

TO SPY

Altman’s Z-score

4.6

3.4

Piotroski’s F-score

6.3

6

ROA % TTM

14.6

7.4

Carry

OUSA invests in large cap, screened and weighted dividend stocks with systematic rules seeking high quality and low volatility. All holdings are below 5%. Technology and healthcare are the two largest sectors, as in the S&P 500. Together they weigh around 42% of asset values. However, they are more balanced than in the broad index, which is overweight in technology. Valuation ratios aren’t cheap, but quality measures are better than S&P 500 averages, especially return on assets. OUSA has lagged the S&P 500 since its inception, but the underperformance is mainly due to a 1.5-year period corresponding to the 2020-2021 market rally. The fund beat the benchmark in 2022. In conclusion, low yield may not satisfy income-seeking investors, but quality filters can become an advantage in a bear market. For transparency, my equity investments are split between a passive ETF allocation (OUSA is not one of them) and my actively managed stability portfolio (14 stocks), disclosed and updated in Quantitative Risk & Value.

Share.

Comments are closed.