BlackRock, Inc. (BLK) yesterday (3/31/11) launched the iShares High Dividend Equity Fund (HDV). The new ETF provides exposure to high quality income-producing U.S. securities based on the Morningstar Dividend Yield Focus Index.
The underlying index seeks to identify companies providing relatively high dividend yields on a consistent basis. Morningstar’s proprietary methodology screens for superior company quality and financial health. The process uses Morningstar’s Economic Moat rating system, which describes the sustainability of a company’s future economic profits. It also uses the Morningstar Distance to Default measure, which quantifies the likelihood that a company may encounter financial distress.
Unlike many other dividend ETFs that have a high exposure to Financials, Morningstar’s process currently produces just a 2.5% weighting to that sector. Overall sector breakdown comes in with Health Care at 25.4%, Consumer Goods 21.4%, Telecommunications 17.4%, Utilities 13.0%, Energy 10.8%, Technology 4.8%, Industrials 3.2%, Financials 2.5%, Consumer Services 0.7%, and Materials 0.6%.
HDV currently has 76 holdings, and the stocks with weightings in excess of 5% of the fund’s assets include AT&T Inc (T) 10.4%, Pfizer Inc (PFE) 6.8%, Chevron Corp (CVX) 6.4%, Verizon Communications (VZ) 6.0%, Johnson & Johnson (JNJ) 6.0%, Proctor & Gamble Co (PG) 5.6%, and Philip Morris International (PM) 5.0%.
The fund has an expense ratio of 0.40%. Sadly, neither the overview nor fact sheet (pdf) presently offer any hint as to what most investors want to know about a dividend ETF – the expected yield.
There is no shortage of competition in the dividend ETF category. The most similar competitor is the First Trust Morningstar Dividend Leaders Index Fund (FDL) (FDL summary). It too is based on a Morningstar dividend index, this one with 100 holdings and significant overlap with HDV’s top holdings. The process Morningstar uses for FDL’s underlying index also produces a low weighting for Financials at just 3.4% and the same four largest sectors. FDL has a slightly higher expense ratio at 0.45%, but at least we know the yield: 4.1% 30-day SEC yield and 3.4% distribution rate as of 2/28/11.