DGRO – Large U.S. Equity Exposure With A Dividend Growth Focus – iShares Core Dividend Growth ETF (NYSEARCA:DGRO)

Quick Facts on DGRO

In today’s low-rate environment, many investors have flocked to dividends as a (hopefully) stable source of income.

Of course, investors care not only about the current yield, but also on the trajectory of the payout.

iShares

Not one to miss an opportunity to create a new product, iShares created the Core Dividend Growth ETF (NYSEARCA:DGRO).

According to iShares, the main reasons that investors might want to own shares of DGRO is the low-cost access to US companies that have in the past consistently grown their dividend payouts. The ETF grants exposure to multiple sectors of the US economy.

iShares

The ETF was formed in June of 2014 and currently has over $8B in assets under management. Trading volume in the shares is quite healthy, at over 1MM shares traded on average over the last 20 days.

MarketChameleon.com – Implied volatility (teal) and options volume (brown)

Technically, options trade on DGRO. The reality is that options volume is too low to put on any kind of meaningful trade or hedge for the product. Outright ownership is likely the best way to approach the fund.

Sector Allocation & Holdings

Morningstar.com

In comparison with Morningstar’s Large Value category, DGRO features outsized allocations to industrials (XLI), tech (XLK), and consumer staples (XLP).

Many think of utilities (XLU) as a big dividend-paying sector, but recall that the DGRO focuses not so much on the dividend level, but rather on steady dividend growth.

Morningstar

It’s interesting that the two largest holdings (about 6% cumulative) are Microsoft (MSFT) and Apple (AAPL), but in fact dividend growth in these shares has been quite strong:

SA Essential: MSFT dividend growth

A little over a quarter of the AUM is allocated to the Top 10 holdings. As of September 25th, DGRO carried a total of the 478 holdings; that seems like a lot – arguably too many. Current share turnover stands at about 26%.

Performance Summary

Finance Yahoo! – compiled by Author

Since its June 2014 inception, DGRO has returned close to 80%. There have been some meaningful drawdowns along the way. An analysis of the time frames above demonstrates that it has experienced flare-ups that are more or less in line with the broader indexes (SPY, DIA, QQQ, IWM).

Data by YCharts

On a total return basis, DGRO has outperformed the Dow Jones over the last year. One can observe that the co-movement between DGRO and the Dow is quite high. In that sense, DGRO should not be thought of as much of a diversifier relative to a large basket of US equity holdings – at least not over the past 12 months.

Return Distribution

Finance Yahoo! – compiled by Author

Since inception, the mean rolling quarterly total return for the shares has been 3.4%. Only 25% of returns were below -.1%, with the very worst near -10%.

The top 5% of quarterly returns for DGRO since inception have been between 8.8% and 11.4%.

Finance Yahoo! – compiled by Author

Short-term realized volatility can kick up without much notice, with the annualized five-day vol readings ranging as low as about 4% to as high as 48%. Investors need to be prepared for a bumpy ride as they collect their dividends and (hopefully) price appreciation.

Finance Yahoo! – compiled by Author

In terms of the more recent vol readings, September 25th measures fairly low relative to the fund’s past performance on a more short-term basis (one-week, two-week, and monthly readings), but the last quarter and year have seen relatively high realized volatility for the shares.

Conclusion

The iShares Core Dividend Growth fund does not appear to be a great diversifier from major US equity index funds such as SPY or DIA, but it has some good points in its favor. The quarterly performance profile looks quite strong, and volatility is certainly present, but has been (mostly) manageable since the fund’s inception.

DGRO has a (too?) large basket of holdings, with low costs and high liquidity. For those who put a premium on dividend growth, this looks like a reasonable approach toward US exposure.

I’ve attached DGRO’s fact sheet and summary prospectus below, and I encourage the interested reader to learn more.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.