Exchange-traded fund provider WisdomTree has launched an equity ETF targeting firms considered likely to increase their dividend payouts in the future. The WisdomTree Eurozone Quality Dividend Growth UCITS ETF (EGRA) has been launched on the London Stock Exchange in euros and British pounds.

Viktor Nossek, Director of Research at WisdomTree Europe.

The fund tracks WisdomTree’s proprietary in-house Quality Dividend Growth Indices, which use specific criteria to establish which companies are growing their dividends. This specific strategy focuses on growth and quality.

Long-term growth expectations are established by consensus analyst estimates as to which firms are growing their earnings faster and therefore have greater potential to increase future dividends.  The constituents selected by WisdomTree’s Quality Dividend Growth Indices exhibit consistently higher median dividend growth compared to market capitalisation-weighted benchmarks ex-Emerging Markets.

Quality factors targeting earnings input uses the three-year average return of equity (ROE) and the return on assets (ROA) to determine how efficiently firms are generating profits. This approach is used because while ROE can gauge profitability, it can be inflated by leverage. ROA offers a means of mitigating over-leverage, and combined with ROE, offers a way of screening for sustainable earnings.

Companies with these “growth and quality characteristics” are then weighted in order to reflect the proportionate share of the aggregate cash dividends each component company paid over the prior annual cycle.

Viktor Nossek, Director of Research at WisdomTree Europe, said in a statement: “We believe that companies that can grow their earnings also have the greatest potential to raise their dividends. Our proprietary quality dividend growth strategies are aligned with Warren Buffet’s approach of investing in companies with a robust return on equity (ROE) and return on assets (ROA) – those with little or low debt. These types of dividend-related strategies are at the core of the WisdomTree investment philosophy.”

Nizam Hamid, ETF Strategist at WisdomTree Europe, added: “We always look to bring to market innovative products across our dividend-oriented investment strategies. In this current low-interest rate environment, we believe a quality tilt in the eurozone may appeal to investors looking for a strategy that concentrates on forward looking fundamentals. The screening methodology we employ for these quality dividend products ensures higher weights in technology and consumer staples along with low weights in financials.”

The newly launched ETF, which has a total expense ratio (TER) of 0.29%, is one of only a handful of ETFs employing this type of strategy on European equities. The SPDR S&P Euro Dividend Aristocrats UCITS ETF (EUDI) tracks the S&P Euro High Yield Dividend Aristocrats Index, which measures the performance of the 40 highest dividend-yielding eurozone companies within the S&P Europe Broad Market Index that have increased or maintained their dividend levels for at least 10 consecutive years. It is offered in euros and British pounds on the LSE and is marginally more expensive with a TER of 0.30%.

Other ETFs to offer exposure to high dividend equities in Europe while screening for quality companies include the Lyxor SG European Quality Income UCITS ETF (LSE: SGQE), which has a TER of 0.45%, and the Source FTSE RAFI Europe Income Physical UCITS ETF (Xetra: DVEU) which has a TER of 0.35%.

The concept of investing in firms with high quality characteristics as well as in firms offering high levels of income is supported by academic research. Fama and French’s “A Five-Factor Asset Pricing Model” paper showed that the highest quality basket of stocks in the US market outperformed by 1.5% per annum from 1963 to 2016, leading to double the market’s return. Furthermore, research by MSCI for the Norwegian Ministry of Finance also highlighted the benefits of focusing on income and dividends with 78.6% of equity returns over the past 10 years coming from a combination of dividend growth and dividend yield, rising to 93% over 20 years.

As of 5 July 2016 WisdomTree’s ETF has significant country exposure to Germany (25.1%), France (21.0%), the Netherlands (19.7%), Spain (13.4%) and Finland (7.6%). The largest sector exposures are to industrials (22.7%), consumer discretionary (21.5%), information technology (21.1%), consumer staples (12.2%) and health care (11.4%). There are 100 holdings in the fund of which the largest constituents are Unilever (5.7%), Sap (5.2%), ASML Holding (5.1%), and Airbus (4.2%).

The other funds in WisdomTree’s Quality Dividend Growth suite includes:
WisdomTree US Quality Dividend Growth UCITS ETF (LSE: DGRA) (TER – 0.33%)
WisdomTree Global Quality Dividend Growth UCITS ETF (LSE: GGRA) (TER – 0.38%)