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July 23, 2021

An Evolved Approach to Core Investing

The Greek philosopher, Heraclitus, was quoted as saying, “change is the only constant in life”. Henri Bergson took it a step further when he said, “to exist is to change, to change is to mature, to mature is to go on creating oneself endlessly.” These two observations regarding change and the ability to adapt to it, are easily seen in the investing arena. The investment industry is continuously evolving in response to changing macro conditions, new products and regulatory environments. One of the biggest benefactors of change has been the world of indexing and exchange traded funds (ETFs). 

 

A Little History

 

In 1889 Charles Dow and his partner, Edward Jones, set up a tiny Wall Street bureau that published a daily newsletter after the stock market closed. The newsletter tracked the daily performance of a handful of stocks, using a methodology that weighted the stocks according to their price. The companies with the highest stock prices received the highest weightings. The newsletter eventually became known as The Wall Street Journal and in 1896, the index became the Dow Jones Industrial Average.

 

At the time, The Dow Jones was a simple way to track the performance of a basket of stocks and like most things it has evolved enormously over the last 125 years. We have seen the world of indexing continue to evolve, moving from price weighted Indices to market-capitalization weighted, with the introduction of the S&P 500 Index in 1957, which gained immense popularity.

 

Where We Are Now

 

The ETF industry, both in Canada and the United States, has long been dominated by products based on market-cap weighted indices. While these strategies are extremely popular and serve a purpose as core building blocks in an investor’s portfolio, they also have several drawbacks. For one, market-cap indices assume the market is efficient and stocks are priced correctly. They are also:

  • prone to pricing bubbles;
  • have no rebalancing discipline; and are
  • susceptible to concentration risk (think Nortel, RIM, or Valeant more recently in the S&P/TSX Composite Index)

 

CI WisdomTree Quality Dividend Growth Suite

 

To overcome these drawbacks, factor indices and factor investing was developed and have quickly gained prominence among investors. Factor indices are designed to track the performance of stocks with specific characteristics or “factors” such as dividends, quality or growth.

 

The CI WisdomTree Quality Dividend Growth ETF suite tracks a family of WisdomTree indices that are designed to overcome some of the issues of market-capitalization indices by taking a multi-factor approach. The indices invest and weight the companies based on the fundamental characteristics of each company, such as dividends, quality and growth. This evolved approach to core investing has proven to be an improvement over traditional index tracking and offers investors another portfolio-building tool. CI Global Asset Management offers the following three strategies that focus on WisdomTree’s Quality Dividend Growth Indices:

 

A Deeper Dive

 

The merits of dividend investing and the power of dividends to compound investor returns over time is well understood as illustrated by the surplus of dividend strategies in the market. However, traditional dividend strategies tend to use backward-looking screens and miss out on companies with the fastest rate of dividend growth. The CI WisdomTree Quality Dividend Growth ETF suite is designed to take a forward-looking approach when it comes to investing in dividend paying companies.

 

 

CI WisdomTree Quality Dividend Growth ETFs are constructed through a combined focus on quality, dividends and growth. The methodology focuses on return on equity (ROE) and return on assets (ROA)—two prominent measures of quality —as well as forward looking earnings expectations to identify dividend paying companies with high-quality balance sheets and strong potential for dividend growth. By combining quality with high profitability, these dividend paying companies have the potential to grow their dividends faster than companies that rely on backward looking screens for dividend growth. For investors that seek to tap into these characteristics, the CI WisdomTree Quality Dividend Growth suite can serve as a core position in globally diversified portfolios.

 

So why does it matter to take a forward approach?

 

Not Your Traditional Dividend Strategy – Apple Inc.

 

While a big focus of the strategy is to invest in dividend paying companies and weight by its Dividend Stream, the CI WisdomTree Quality Dividend Growth ETFs is not your traditional dividend strategy. The ETFs do not attempt to invest in the highest-yielding companies or the companies that have the longest track-record of paying dividends. Instead, the ETFs invest in high quality companies that have the opportunity for future dividend growth while seeking to maximize total return. The best way to illustrate is by looking at Apple Inc.

 

Apple is currently the largest dividend payer in the U.S. based on total dollar of dividends paid, but the company only initiated dividends in 2012. Traditional Aristocrats Dividend strategies using backward-looking screens would be prohibited from including Apple, while Apple Inc. makes up one of the largest weights in the CI U.S. WisdomTree Quality Dividend Growth Index ETF (DGR/DGR.B).

 

A Strong Response to Change

 

The CI WisdomTree Quality Dividend Growth suite’s combined focus on quality, dividends and growth has resulted in the funds and their underlying indices exhibiting strong historical absolute and risk-adjusted returns with higher quality metrics.

 

The world of indexing and index-based ETFs have adapted strongly to change since the launch of the first ETF over 30 years ago. Investors now have a plethora of options outside of traditional index funds to help them achieve their investment outcomes.

About the Author

Nirujan Kanagasingam


Nirujan Kanagasingam

Blog Author
CI Global Asset Management

As Director of ETF Strategy, Nirujan’s primary responsibility includes working with the various departments within CI GAM to set and execute the ETF Sales Strategy and help promote the growth of the ETF business. Nirujan’s responsibilities also includes overseeing the ETF Sales Support team where he works alongside the sales team in assisting investors and advisors on ETF education and support. Nirujan brings a wealth of ETF knowledge, including ETF product management, indexing, factor research, ETF portfolio development, and has been involved in the launch of many ETFs in the Canadian marketplace. Prior to joining CI GAM, Nirujan held progressively senior roles with global asset managers Invesco and Horizons ETFs, where responsibilities included product management, product development and sales strategy in both the Canadian and U.S market. Nirujan holds a Bachelor of Commerce (Finance and Accounting) from Ryerson University and is a Level III candidate in the CFA Program.

IMPORTANT DISCLAIMERS

 

Commissions, management fees and expenses all may be associated with an investment in exchange-traded funds (ETFs). You will usually pay brokerage fees to your dealer if you purchase or sell units of an ETF on recognized Canadian exchanges. If the units are purchased or sold on these Canadian exchanges, investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current net asset value when selling them. Please read the prospectus before investing. Important information about an exchange-traded fund is contained in its prospectus. ETFs are not guaranteed; their values change frequently, and past performance may not be repeated.

 

This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication.  Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. 

 

The opinions expressed in the communication are solely those of the author(s) and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.

 

The author and/or a member of their immediate family may hold specific holdings/securities discussed in this document. Any opinion or information provided are solely those of the author and does not constitute investment advice or an endorsement or recommendation of any entity or security discussed or provided by CI Global Asset Management.

 

CI Global Asset Management is licensed by WisdomTree Investments, Inc. to use certain WisdomTree indexes (the “WisdomTree Indexes”) and WisdomTree marks.

 

“WisdomTree®” and “Variably Hedged®” are registered trademarks of WisdomTree Investments, Inc. and WisdomTree Investments, Inc. has patent applications pending on the methodology and operation of its indexes. The ETFs referring to such indexes (the “WT Licensee Products”) are not sponsored, endorsed, sold, or promoted by WisdomTree Investments, Inc., or its affiliates ("WisdomTree"). WisdomTree makes no representation or warranty, express or implied, and shall have no liability regarding the advisability, legality (including the accuracy or adequacy of descriptions and disclosures relating to the WT Licensee Products) or suitability of investing in or purchasing securities or other financial instruments or products generally, or of the WT Licensee Products in particular (including, without limitation, the failure of the WT Licensee Products to achieve their investment objectives) or regarding use of such indexes or any data included therein.

 

Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI Global Asset Management has taken reasonable steps to ensure their accuracy. Market conditions may change which may impact the information contained in this document.

 

CI Global Asset Management is a registered business name of CI Investments Inc. 

 

©CI Investments Inc. 2021.  All rights reserved. 

 

Published July 19, 2021

 

Originally published in Canadian ETF Watch, Summer 2021, June 8, 2021

 

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