ETF SMDV: investing in small caps with lower risk

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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 their weightings change over time, I may update reviews, usually no more than once a year.

SMDV strategy and portfolio

The ProShares Russell 2000 Dividend Growers ETF (SMDV) has tracked the Russell 2000 Dividend Growth Index since 02/03/2015. It has 89 holdings, a payout yield of 2.10% and a total expense ratio of 0.40%.

As described in the prospectus by ProSharesthe fund invests incompanies that are currently members of the Russell 2000 Index, have increased their dividend payments each year for at least 10 consecutive years and meet certain market capitalization and liquidity requirements”. Constituents are equal weight with a maximum of 30% in any sector. The underlying index is replenished annually in June and rebalanced quarterly.

SMDV invests exclusively in companies based in the United States. The SMDV is more expensive than the parent Russell 2000 Index (IWM) in price to earnings and price to cash flow. However, it is a little cheaper in price/book and price/sales (see following table).

SMDV

IWM

Price/Benefit

17.71

14.78

Price/Book

1.83

2.15

Price/Sales

1.29

1.35

Price/cash flow

13.21

10.97

In fact, the valuation ratios are questionable due to the large weight of financials, where these measures are not reliable (around 30% of the value of assets). Two other large sectors are utilities and industry, both between 18% and 19%. The other sectors do not weigh more than 11% individually and 34% cumulatively. Compared to IWM, SMDV is overweight not only financials, utilities and industrials, but also consumer staples and materials. It underweights all other sectors.

SMDV sectors

SMDV sectors (Graphic: author; data: Fidelity)

All constituent weights are equal after each rebalance, but they can drift with price action. The current top 10 holdings are listed below along with some fundamental ratios. They represent 13.8% of the asset value. The largest position weighs 1.64%, so individual stock risk is low.

Teleprinter

name

Weight

EPS growth %TTM

P/E TTM

P/E front

Yield%

SJI

South Jersey Industries Inc.

1.64%

0.10

21.28

20.93

3.54

ANDE

Andersons Inc

1.47%

1288.70

2:25 p.m.

3:42 p.m.

1.64

PSTN

Spartan Nash Co

1.42%

-3.31

14.97

3:31 p.m.

2.75

NWN

North West Natural Holding Co

1.39%

10:45 a.m.

21.65

9:45 p.m.

3.48

NRT

Trinity Industries Inc.

1.35%

136.85

63.63

28.02

2.90

BANF

BancFirst Corp

1.32%

67.77

3:41 p.m.

7:34 p.m.

1.86

WOR

Worthington Industries Inc.

1.32%

-21.81

7.15

8.85

1.93

ENSG

Ensign Group Inc.

1.30%

11.86

25.58

21.62

0.25

UVV

Universal Corp.

1.30%

56.92

13.99

N / A

5.54

AV

Avista Corp.

1.29%

10.59

21.52

22.21

3.90

Historical performance

Since their inception in February 2015, SMDV and IWM have had almost identical annualized returns. However, SMDV has much better risk metrics (drawdown and volatility), which results in a higher risk-adjusted performance (Sharpe ratio).

Full return

Annual return

Sample

Sharpe report

Volatility

SMDV

84.83%

9.07%

-34.12%

0.62

14.50%

IWM

83.58%

8.96%

-41.13%

0.49

19.68%

Data calculated with Portfolio123

The following chart plots the equity value of $100 invested in SMDV and IWM since SMDV’s inception.

SMDV vs IWM Equity Value Chart

SMDV versus IWM (Graphic: author; data calculated with Portfolio123)

SMDV alternately beat and lagged the small cap benchmark. They are almost on par in total return at the time of writing. The chart visually confirms that SMDV is less volatile.

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 SMDV since inception with a subset of the S&P 500: stocks with above-average dividend yield and ROA, good Z Altman score and F Piotroski score, and sustainable payout ratio. It is rebalanced annually to make it comparable to a passive index.

Full return

Annual return

Sample

Sharpe report

Volatility

SMDV

84.83%

9.07%

-34.12%

0.62

14.50%

Dividend quality subset

110.23%

11.07%

-36.33%

0.7

15.48%

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

The dividend quality subset beats SMDV by 2 percentage points in annualized total return. However, the performance of the fund is real and the subset is hypothetical. My base portfolio contains 14 stocks selected from this subset (more info at the end of this article).

SMDV scanning with quality metrics

SMDV holds 88 shares. I scanned them with my quality metrics, considering that risk stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout rate, bad or questionable Altman Z-score, at the excluding finance and real estate where these metrics are less relevant. With these assumptions, 12 holdings are risky and weigh around 13.6% of the asset value. It’s not very good, but it’s still acceptable.

By my calculations, SMDV beats the Russell 2000 in Altman Z-score, Piotroski F-score and ROA. However, the S&P 500 (SPY) is doing much better. These measures indicate portfolio quality slightly above the small cap benchmark and below the large cap benchmark.

Aggregates

Altman’s Z-score

Piotroski’s F-score

ROA % TTM

SMDV

3.10

5.25

4.12

IWM

2.44

4.89

0.56

TO SPY

3.49

6.53

7.82

Carry

SMDV is an equal weight small cap dividend growth ETF. Its significant weight in financials can distort its aggregate fundamental ratios. The quality measured by my quality indicators (excluding financials) is higher than the parent Russell 2000 index, but lower than a large-cap benchmark. Risky stocks (also excluding financials) represent around 13% of the value of assets. SMDV has tied with the Russell 2000 in return since inception, but beats it in risk-adjusted performance thanks to lower volatility. SMDV has a 2-star rating from Morningstar, which I find a bit understated in terms of its low-risk profile among other small-cap ETFs. For transparency, a portion of my dividend-oriented equity investments are split between a passive ETF allocation (SMDV not included) and my actively managed stability portfolio (14 stocks), disclosed and updated in Quantitative Risk & Value.

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