Should the First Trust Morningstar Dividend Leaders ETF (FDL) Be on Your Investing Radar?

The First Trust Morningstar Dividend Leaders ETF (FDL) was established on March 9, 2006. This passively managed exchange-traded fund aims to provide extensive exposure to the Large Cap Value segment of the U.S. equity market.

Sponsored by First Trust Advisors, this ETF has accumulated over $4.49 billion in assets, making it one of the more substantial ETFs in the Large Cap Value category.

Understanding Large Cap Value

Large cap companies generally have a market capitalization that exceeds $10 billion. These companies tend to be stable entities with consistent cash flow, usually exhibiting less volatility when compared to mid and small cap firms.

Value stocks are characterized by their lower price-to-earnings and price-to-book ratios. They also display lower sales and earnings growth rates when examined over time. Historically, value stocks have outperformed growth stocks in varied market conditions, although they might lag during robust bull markets.

Cost Considerations

When selecting the right ETF, cost plays a crucial role. Cheaper funds can significantly outperform their more expensive counterparts, assuming all other variables remain constant.

This particular ETF has an annual operating expense ratio of 0.45%, which is competitive compared to many similar funds in this sector.

It boasts a 12-month trailing dividend yield of 4.95%, which adds to its appeal for yield-seeking investors.

Sector Allocation and Key Holdings

Although ETFs are designed to provide diversified exposure and reduce single-stock risk, it's important for investors to review the underlying holdings within the fund. Fortunately, most ETFs maintain transparency and provide daily disclosures of their holdings.

The First Trust Morningstar Dividend Leaders ETF primarily invests in the Healthcare sector, which constitutes roughly 21.50% of its portfolio. Financials and Consumer Staples also feature prominently in the top three sectors.

Among the ETF's top individual holdings, AbbVie Inc. represents about 8.38% of total assets. It is followed by Verizon Communications Inc. and Chevron Corporation. Collectively, the top 10 holdings make up approximately 55.71% of the total assets managed by the fund.

Performance Analysis and Risk Levels

The ETF aims to replicate the performance of the Morningstar Dividend Leaders Index, before fees and expenses. This Index comprises stocks listed on major exchanges that have shown reliable dividend consistency and sustainability.

As of mid-January 2025, the ETF has posted a modest gain of around 0.17% this year and has surged approximately 17.60% over the past twelve months. During the prior 52-week period, shares have traded within a range from $35.29 to $43.95.

Its beta is 0.88, indicating that it may have slightly lower volatility compared to the broader market. The ETF's standard deviation stands at 14.93% for the trailing three-year period, placing it in the medium-risk category. With roughly 96 holdings, it effectively mitigates the risk associated with individual companies.

Exploring Alternatives

The First Trust Morningstar Dividend Leaders ETF has been rated with a Zacks ETF Rank of 3, indicating a 'Hold' recommendation based on factors such as anticipated asset class return and momentum. For investors looking for exposure within the Style Box - Large Cap Value segment, FDL presents a reasonable option.

Investors may also wish to consider alternative ETFs in this arena. Options like the Schwab U.S. Dividend Equity ETF and the Vanguard Value ETF track comparable indices. The Schwab U.S. Dividend Equity ETF manages $66.40 billion in assets, while the Vanguard Value ETF has even more, at $129.12 billion. Notably, SCHD has an expense ratio of just 0.06% and VTV comes in at a low 0.04%.

Conclusion

More retail and institutional investors are turning to passively managed ETFs due to their cost-effectiveness, transparency, flexibility, and tax efficiency. These attributes make them excellent vehicles for long-term investment strategies.

For those interested in further product information or other ETFs, it is advisable to screen for options that align with individual investment objectives and keep abreast of the latest developments in the ETF marketplace.

ETF, Investment, Dividend