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

The First Trust Morningstar Dividend Leaders ETF (FDL - Free Report) was established on March 9, 2006, as a passively managed exchange-traded fund that aims to provide investors with extensive exposure to the Large Cap Value sector of the U.S. equity market.

This fund is managed by First Trust Advisors and has grown to hold assets exceeding $4.49 billion, marking it as one of the larger ETFs focused on the Large Cap Value segment.

Understanding Large Cap Value

Large cap companies are typically defined as those with a market capitalization of more than $10 billion. These companies usually exhibit stability, predictable cash flows, and tend to have lower volatility compared to their mid and small-cap counterparts.

Value stocks, on the other hand, feature lower-than-average price-to-earnings and price-to-book ratios, as well as below-average sales and earnings growth rates. Historically, value stocks have outperformed growth stocks across most market environments, although they may lag behind growth stocks during robust bull markets.

Cost Considerations

Cost is a pivotal factor when selecting an ETF. Lower-cost options can provide significantly better returns than their high-cost peers if other fundamentals are comparable.

The annual operating expenses for FDL are pegged at 0.45%, which aligns it with many of its rivals in the sector.

The fund also boasts a 12-month trailing dividend yield of 4.95%, which is appealing to many income-seeking investors.

Sector Weighting and Key Holdings

While ETFs are generally designed to distribute risk across multiple holdings, it is beneficial for investors to understand what specific assets are included in the fund. Transparency is one advantage of most ETFs, as they disclose their holdings daily.

FDL predominantly allocates around 21.50% of its portfolio to the Healthcare sector, with significant investments also in Financials and Consumer Staples.

Among its leading holdings, Abbvie Inc. (ABBV - Free Report) represents approximately 8.38% of total assets. This is followed by Verizon Communications Inc. (VZ - Free Report) and Chevron Corporation (CVX - Free Report). The top ten holdings make up about 55.71% of the total assets under management.

Performance and Risk Analysis

FDL endeavors to replicate the performance of the Morningstar Dividend Leaders Index, before accounting for fees and expenses. This index comprises stocks listed on major U.S. exchanges, recognized for their consistent dividends and sustainable payouts.

This ETF has seen a modest increase of approximately 0.17% year-to-date and an impressive year-over-year gain of around 17.60% (as of January 15, 2025). Throughout the last 52 weeks, the ETF's price has fluctuated between $35.29 and $43.95.

With a beta of 0.88 and a standard deviation of 14.93% over the trailing three years, FDL presents a medium risk option within its sector. It consists of about 96 holdings, effectively mitigating company-specific risks.

Exploring Alternatives

FDL carries a Zacks ETF Rank of 3 (Hold), reflecting its position based on factors like expected asset class returns, expense ratios, and momentum. Hence, FDL serves as a valid choice for investors looking for exposure to the Large Cap Value category. However, there are additional ETF options investors might consider.

Two notable alternatives include the Schwab U.S. Dividend Equity ETF (SCHD - Free Report) and the Vanguard Value ETF (VTV - Free Report). The Schwab U.S. Dividend Equity ETF manages assets totaling $66.40 billion, while the Vanguard Value ETF has a larger pool of $129.12 billion. Notably, SCHD has a lower expense ratio of 0.06% and VTV charges just 0.04%.

Conclusion

Passively managed ETFs like FDL are gaining traction among both retail and institutional investors due to their low costs, transparency, flexibility, and tax benefits. These funds also represent excellent vehicles for long-term investors seeking to build wealth over time.

For further details on this ETF and others, it’s advisable for investors to screen for options that align with their investment goals and stay updated with the latest trends in the ETF universe.

ETF, Investment, Finance