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While there’s something to be said for playing defense, asset allocators have had little reason to indulge that sentiment. With clients captivated by the artificial intelligence (AI) theme and growth stocks delivering the goods, it’s been risky to be heavily allocated to defensive groups.
Not to mention the point that defensive sectors such as consumer staples, healthcare and utilities have been dogs while higher octane counterparts communication services and technology are delivering significant upside. Many defensive stocks are also dividend payers, meaning the equity income thesis has taken some lumps amid AI ebullience and still high interest rates.
Of course, experienced advisors know these scenarios don’t last forever and it’s usually better to have even small exposure to defensive strategies before that exposure is needed.
For advisors that don’t want to stock pick to that effect, the First Trust Value Line® Dividend Index Fund (FVD) is a potentially compelling consideration.
Examining FVD Credentials
Considering it’s nearly 21 years old and has $9.43 billion in assets under management, FVD doesn’t grab headlines commensurate with those data points. Perhaps it should. The fund follows the Value Line® Dividend Index, which uses Value Line’s safety ranking system. Only stocks with scores of 1 or 2 are eligible for inclusion.
Not only does that mitigate risk, but it makes FVD a credible complement to portfolios that are heavy on growth stocks of funds because while many growth stocks are quality companies, they aren’t necessarily “safe.”
“In our view, FVD has historically worked well as a complement to growth-oriented investments due to its underlying index methodology, which typically favors high quality stocks with less volatility and market risk (beta) than broad market benchmarks, such as the S&P 500® Index,” according to First Trust research. “Holdings for FVD are chosen monthly based on a combination of factors, including “Safety” rankings from Value Line®—which provide a quantitative assessment of financial strength and price stability—and above average dividend yields. Very few growth stocks meet these criteria, leading to low overlap between FVD and most growth funds. As of 4/30/24, FVD holdings represented 8.6% of the S&P 500® Growth Index.”
Historical data confirm the utility of FVD in adding some safety to portfolios and taking some of the edge off growth positions. As noted above, the ETF is nearly 21 years. Of the 237 rolling 12-month periods dating back to the ETF’s inception in August 2021, the ETF’s beta to the S&P 500 exceed 1.0 just 4.6% of the time, but the S&P 500 Growth Index did so 48.9% of the time, notes First Trust.
FVD Surprising Alpha Abilities
Advisors are well-acquainted with the difficulty in generating alpha, or superior risk-adjusted returns. To put it succinctly, it’s one of the hardest pursuits in finance.
However, it’s not impossible and it’s quite possible even when playing as highlighted by FVD’s long-term track record.
“Another factor that makes FVD an effective complement to growth funds and ETFs, in our opinion, is its track record of producing positive alpha during periods of underperformance for growth stocks,” concludes First Trust. “Since August of 2003, the S&P 500® Growth Index has had positive alpha in 62% (146 periods) of rolling 12-month periods, while FVD has had positive alpha in 65% (154 periods) of rolling 12-month periods. Instances in which neither had positive alpha occurred under 4% (nine periods) of the time, but instances in which both has positive alpha occurred 30% (72 periods) of the time.”