Deconstructing ‘Smart Beta’

August 21, 2014


Think about dividend funds (Figure 7). There are lots of great reasons to seek dividend-paying securities. Retirees like the cash flows, as do yield-seekers weary of the bond market. I reckon it will be useful to see all the dividend funds in a single list. Figure 7 shows all the dividend funds in the U.S. total market universe.


Not included in Figure 7: Schwab’s US Dividend Equity ETF (SCHD | A-86). SCHD’s underlying index, the Dow Jones U.S. Dividend 100 Index, is more complicated than you might think. It looks for high yields, a history of dividend payment and, critically, “strong relative strength based on select financial ratios.”

Financial ratios are the stuff of fundamental analysis; their inclusion in the DJ US Dividend 100 Index methodology catapults SCHD out of the dividend strategy group and into fundamentals.

Also not on this list: FlexShares’ Quality Dividend Fund (QDF | B-76). QDF belongs not in dividends or fundamentals, but in multifactor, because its index optimizes for management efficiency, profitability, cash flow, dividend yield and beta, with sector, industry, region and style factor constraints.

Compare SCHD’s and QDF’s year-to-date returns with’s dividend funds that select from the total U.S. market. With the exception of cap-weighted VIG, all the dividend funds outperformed SCHD and QDF this year to date (Figure 8).



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