The FlexShares Quality Dividend Defensive Index Fund (QDEF) is part of Northern Trust’s stable of proprietary twists on factor investing. The fund follows a Northern Trust index that selects dividend-paying large-cap U.S. equities. Simple enough, but then the index weights the portfolio toward companies that earned the highest “dividend quality” scores. To prevent unintentional concentrations, the methodology caps the weighting of individual securities, industry groups, sectors and styles. Lastly, there’s the “defensive” spin. QDEF aims to deliver “below market beta exposure” — jargon used to describe how volatile the performance is relative to the market. It’s another way of saying QDEF tries to tamp down volatility.
The approach to market beta is the nuance that sets it apart from its sister funds FlexShares Quality Dividend Index Fund (QDF) and FlexShares Quality Dividend Dynamic Index Fund (QDYN), which aim to match or exceed market swings, respectively. In practice, all three funds share many of the same top holdings, including blue-chip stocks like Apple, Johnson & Johnson, and Microsoft. The difference comes down to weighting. QDEF might have less invested in volatile tech stocks, and more in staid utilities.
As with many FlexShares funds, investors will pay a premium. Management fees, though not eye-popping for proprietary index strategies, are multiples higher than U.S. equity ETFs offered by massive passives like Vanguard and iShares. Is it worth it? Investors can look at it several different ways. There are other factor variations on defensive dividend investing, such as the WisdomTree U.S. Quality Dividend Growth Fund (DGRW) or the Legg Mason Low Volatility High Dividend ETF (LVHD). Both share a roughly similar investment case with QDEF. Each uses its own proprietary index recipes, which results in noticeably different portfolios. (Both are also cheaper than QDEF.) There are also straightforward quality-focused funds, like the relatively inexpensive iShares Edge MSCI U.S.A. Quality Factor ETF (QUAL), which shares a number of top holdings with QDEF. There are other proprietary defensive strategies, like the Invesco Defensive Equity ETF (DEF), as well as the traditional mainstays of defensive investing: utility ETFs like the Utilities Select Sector SPDR (XLU). Lastly, there are the ultra-cheap dividend ETFs like the giant Vanguard Dividend Appreciation ETF (VIG) or the Vanguard High Dividend Yield ETF (VYM). Both offer more liquidity than QDEF at a fraction of the price.