Exchange-traded fund provider WisdomTree Europe has launched two ETFs targeting dividend-paying companies that have strong future dividend growth potential.

Viktor Nossek, Head of Research at WisdomTree (Europe).

The WisdomTree US Quality Dividend Growth UCITS ETF (DGRA) and WisdomTree Global Quality Dividend Growth UCITS ETF (GGRA) track proprietary in-house indices, and have begun trading on the London Stock Exchange.

Each index scores its potential constituents across growth and value factors. By choosing companies with higher long-term earnings growth forecasts, based on consensus analyst estimates, the indices attempt to favour firms which have greater potential to increase future dividends.

For its value screen, each index evaluates its potential constituents according to three-year average return of equity (ROE) and return on assets (ROA). These metrics indicate the efficiency at which firms generate earnings and thus is indicative of its capacity to increase dividends. Whilst ROE offers a means of gauging profitability, it can be inflated by leverage. ROA on the other hand offers a means of mitigating overleverage, and combined with ROE, offers a way of screening for sustainable earnings.

Securities are weighted in the indices to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year.

The constituents selected by WisdomTree’s Quality Dividend Growth Indices have exhibited consistently higher median dividend growth compared to market capitalisation-weighted benchmarks excluding emerging markets.

Viktor Nossek, Director of Research at WisdomTree Europe, commented in a statement: “Investors are keen to explore more developed methodologies to gain access to dividend-related strategies and at WisdomTree, we believe in the power of dividends to deliver the potential for enhanced risk-adjusted returns. In building these new proprietary strategies, we employ the same ’Buffett factors’ of return on equity (ROE) and return on assets (ROA) as a driving force for stock selection in our Quality Dividend Growth strategies, tilting towards quality companies with low debt and high return on equity.”

Nizam Hamid, ETF Strategist at WisdomTree Europe, added: “The addition of these new ETFs – based on an evolving but proven investment strategy focused on quality dividends – means that we now offer UCITS ETFs that cover the full spectrum of dividend and income related investment themes. The WisdomTree Global Quality Dividend Growth UCITS ETF (GGRA) also represents our first global equity product to be launched on our UCITS platform. By creating innovative and transparent strategies we aim to bring to clients a breadth of dividend-oriented investment solutions that are critical in today’s low interest rate environment.”

Each fund has been listed with US dollar and British pound share classes.

As of 9 June 2016, the WisdomTree US Quality Dividend Growth UCITS ETF has significant exposure to the industrials (20.6%), consumer discretionary (19.8%), information technology (19.2%), consumer staples (18.2%) and health care (14.6%) sectors. There are over 270 holdings in the fund of which the largest exposure is Coca-Cola (4.2%). The total expense ratio (TER) of the fund is 0.33%.

A version of the fund was launched in the US in 2013 and is currently listed on the Nasdaq Exchange. The fund is up 5.3% year-to-date (9 June 2016) and 15.3% from its 2016 low in February.

As of 9 June 2016 the WisdomTree Global Quality Dividend Growth UCITS ETF has significant exposure to the US (50.0%), the UK (12.7%), Japan (7.2%) and Switzerland (5.2%). The largest sector exposures are to information technology (20.2%), consumer discretionary (18.7%), industrials (16.5%), health care (15.3%) and consumer staples (14.1%). There are over 500 holdings in the fund of which the largest single constituents are Microsoft (4.2%) and Apple (4.0%). TER – 0.38%.

In Europe the newly launched funds will be competing against a range of high dividend ETFs with quality screens. These include:

Lyxor SG Global Quality Income NTR UCITS ETF (SGQD LN). TER – 0.45%
UBS ETF DJ Global Select Dividend UCITS ETF (Xetra: UBUM).TER – 0.30%
SPDR S&P Global Dividend Aristocrats UCITS ETF (GLDV LN). TER – 0.45%

iShares MSCI USA Dividend IQ UCITS ETF (QDIV LN). TER – 0.35%
SPDR S&P US Dividend Aristocrats UCITS ETF (UDVD LN). TER – 0.35%
Source FTSE RAFI US Equity Income Physical UCITS ETF (DVUS LN). TER – 0.35%