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The First Trust Value Line Dividend Index ETF (FVD), one of First Trust’s most popular dividend-focused exchange-traded funds, recently celebrated its tenth anniversary – and it did so in style, posting a 10-year performance number that trumped the S&P 500 Index by 2% annually.
The NYSE Arca-listed fund is also the holder of a 5-Star Overall Morningstar Rating, putting it in the top 10% of the 1028 funds in the Large Value category based on the ETF’s Morningstar Risk-Adjusted Return measure.
A key part of the fund’s success and appeal – the fund has more than $730 million in assets – is down its underlying strategy, represented by the Value Line Dividend Index, which incorporates Value Line’s ‘Safety Ranking’ methodology
The Value Line Safety Ranking ranks stocks on a scale of 1 (highest) to 5 (lowest) based on price stability and financial strength. Stocks with the highest rank are deemed to be the safest, most stable and least risky investments relative to the Value Line universe. Stocks with the lowest rank are deemed to be the riskiest and least safe.
Stocks with high safety ranks are often associated with large, financially sound companies. However, these same companies also often have somewhat less-than-average growth prospects because their primary markets tend to be growing slowly or not at all. Stocks with low safety ranks are often associated with companies that are smaller and/or have weaker-than-average finances. On the other hand, these smaller companies sometimes have above-average growth prospects because they start with a lower revenue and earnings base.
The methodology of the Value Line Dividend Index employs this safety ranking to weed out riskier and more volatile stocks. It does so by only including those stocks with a safety ranking of 1 or 2. The index then excludes all registered investment companies, limited partnerships and foreign securities not listed in the US, and companies with a market capitalisation of less than $1 billion. Finally, the index selects those companies with a higher-than-average dividend yield, as compared to the S&P 500 Index, and weights them equally.
By incorporating the Value Line Safety Ranking, the index avoids chasing yield, thus shunning so-called value traps where a high dividend yield is merely a function of a collapsing share price.
Commenting on the 10-year milestone, Ryan Issakainen, Senior Vice President and ETF Strategist at First Trust, said: “While the field has become more crowded over the past few years, FVD has distinguished itself for over a decade as an effective tool for investors seeking below-average volatility with above-average dividends.”
The fund has a net expense ratio of 0.70%.