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ETF Profile
The ProShares S&P MidCap 400 Dividend Aristocrats ETF (BATS:REGL) is a $1.5bn sized product that offers coverage to mid-cap companies that have paid and grown dividends for at least 15 successive years on the trot. REGL’s goal is to cover at least 40 stocks (as of now they cover 46 stocks) that have passed the 15-period barrier, but in the off chance that it is unable to procure that stated number, REGL is prepared to reduce the 15-year threshold.
REGL’s expense ratio of 0.40% makes it a tad more expensive (5bps) than the more popular- NOBL ETF ($11.6bn in AUM) which can be pursued at an expense ratio of 0.35%. However, do consider that since the pandemic, REGL has compensated for this by offering a more compelling yield which is currently around 30bps higher.
For the uninitiated NOBL focuses solely on the dividend aristocrats of the S&P500 and demands a much higher barrier of at least 25 years of dividend growth from its potential constituents.
Reasons To Consider REGL
The ability to consistently grow your dividends across long periods of time is not something to be scoffed at, and speaks to the underlying strength of the business models of these stocks.
In terms of capital allocation priorities, dividend distributions typically only come after organic investments, and M&A initiatives are budgeted for. And if a company is able to consistently beef up this dividend outlay every successful year, one can certainly make positive inferences about its free cash flow generating ability.
This feature is even more of a standout when you’re dealing with mid-caps, as these companies are a lot further away from the saturation stage of their life cycle (vis-à-vis large-caps), offering plenty of opportunities to plow back some of the excess cash back into developing and growing the business, rather than distribute it. Yet, despite this base premise, it takes some doing, to keep increasing your payouts for at least 15 years on the trot.
It’s evident that the market has a predilection for mid-caps who have grown their dividends over long periods, and this is reflected in how REGL has outperformed its base universe of the S&P 400 Mid Cap ETF (SPMD) since the former made its debut.
Even from a risk angle, the portfolio of REGL is perceived to be safer, with a lower rolling volatility profile over time.
Besides all that REGL has also demonstrated a far superior track record in juggling its risk profile in its attempt to generate excess returns (as measured by the superior Sharpe ratio). REGL’s competence also comes through in the face of harmful volatility with a Sortino reading that beats SPMD’s corresponding number.
REGL’s valuation picture looks quite attractive at this juncture. According to Morningstar, our focus ETF is priced at only 14.2x P/E; this translates to a meaningful 24% discount relative to the dividend aristocrats of the S&P 500, and a 6% discount relative to the broader S&P 400 mid-cap index.
Then, the chart below highlights how investors looking for bargain opportunities within the broad dividend aristocrat universe will likely plump for REGL’s holdings, as its relative strength (RS) ratio is currently trading around 7% lower than the mid-point of its long-term range.
The chart below also suggests that the dividend aristocrats of the S&P 400 mid-caps could benefit from rotational interest, as even here, the current relative strength ratio is 7% lower than the mid-point of the long-term range.
Closing Thoughts- Reasons To Be Cautious
REGL’s valuation and relative strength picture may support a long position, but when we view the price imprints on REGL’s own standalone chart, we are less enthused.
The image below captures REGL’s weekly price imprints since the onset of the pandemic. From the start of the pandemic until May 2021, we saw investors swarm to the REGL counter in the shape of an ascending channel. After such a strong move, it was reasonable to expect some consolidation for a few months (perhaps like a bull flag or a pennant), before expecting another move higher.
However, what we have seen is that bullish momentum looks to have ebbed, and rather this has given way to prolonged directionless choppiness for well over 32 months. Put another way, REGL has now taken on the mantle of becoming more of a trading vehicle, where one is likely to profit by playing the boundaries of its trading range.
In light of these conditions, and where the two boundaries are placed, it is clear that the reward-to-risk equation for a long position at this juncture looks rather unappealing.
Investors may also want to think twice about going long here, as recent developments on the fund flow chart suggest that some big parties are unloading their stake in REGL. With only 50% of the current month underway, we’ve already witnessed fund outflows to the tune of $142m, which represents a hefty weight of 9% of REGL’s total AUM.
