Broadly speaking, clients love dividend stocks and funds and many are coming around to environmental, social and governance (ESG) investing. Leave it to the intrepid world of exchange traded funds issuers to marry to those two concepts.
The Xtrackers S&P ESG Dividend Aristocrats ETF (CBOE:SNPD) debuted on Wednesday, giving investors an avenue for combining dividend growth stocks with an ESG overlay. While SNPD is obviously a new ETF and as such will take some time to reach the necessary assets under management milestones to pop up on advisors’ clearing platforms, but the rookie fund could be worth keeping an eye on.
SNPD debuted along with the Xtrackers S&P 500 Growth ESG ETF (CBOE: SNPG) and the Xtrackers S&P 500 Value ESG ETF (CBOE: SNPV), proving issuers are taking ever refined lens to bring more ESG products to market.
“At a time of high inflation and rising interest rates, investors are looking for products that allow them to target specific investment styles in order to tailor their portfolios in line with market expectations,” said Arne Noack, Head of Systematic Investment Solutions, Americas. “Our dividend, growth and value ESG ETFs let them do that, while adding to our series of ETFs that can be useful for investors seeking credible ESG alternatives to mainstream equity indices. New funds also reinforce DWS’s capacity to provide innovative ESG-centric investment solutions across asset classes.”
SNPD DNA Matters
SNPD follows the S&P ESG High Yield Dividend Aristocrats Index, which is the ESG derivative of the S&P High Yield Dividend Aristocrats Index, which mandates the member firms have a minimum dividend increase streak of 20 years.
Dividend growth, whether in ESG or traditional form, is likely to be appealing to a broad swath of clients because it’s one of the strategies with the best inflation-fighting credentials over the long haul.
“Dividends have become an important source of household income for U.S. investors and accounted for 7.3% of personal income as of Q1 2022, climbing from 3.2% in 1980,” notes S&P Dow Jones Indices. “Over the same period, interest income has declined in share from 16.2% to 9.2%. In the current environment of rising inflation and interest rates, dividends may also provide the benefit as an inflation hedge.”
Adding to the potential allure of SNPD is that while its underlying index isn’t “ancient” in indexing terms, it’s establishing a reputation of being a volatility buffer.
“Nonetheless, the S&P ESG Dividend Aristocrats Index Series managed to ride this period delivering similar and often better performance compared to its non-ESG counterparts. Furthermore, despite some market headwinds, the S&P ESG Dividend Aristocrats Indices increased their dividend yield over the past 12 months, further emphasizing the resilience of such strategies,” according to S&P.
Encouraging Yield Trends
While SNPD is structured as a dividend growth strategy, the yield trends on its underlying index over the past year have been encouraging. That is to say that dividend yield is increasing not solely by way price declines for member equities.
“Interestingly, the S&P ESG Dividend Aristocrats Indices’ dividend yield increased over the course of the past 12 months, not only in absolute terms but also compared with the standard S&P Dividend Aristocrats versions,” concludes S&P. “Although the yield was still lower, the spread has been tightening. The current market dynamics may be driving these fluctuations in yield spreads. However, it is worth noting that with additional screens applied to the ESG versions of Dividend Aristocrats, yields of the S&P ESG Dividend Aristocrats Indices could remain at a discount to their non-ESG counterparts.”
SNPD allocates almost 22% of its weight to consumer staples equities and a combined 30.08% to the industrial and financial services sectors so it’s not stretching deeply into high-dividend territory.
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