NOBL ETF October Report: 1% Market Miss, Investors Should Pass (2024)

Overview

Introduction

The ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) once again underperformed the S&P 500 Index (SPY) in October, as evidence mounts that 25 years' worth of consecutive dividend increases isn't as impressive as it once was. Although NOBL gained a solid 5.95% last month, that was still more than a percentage point behind the S&P 500. Once again, a lack of exposure to Technology stocks was a significant factor. It's a recurring issue that isn't going to be solved anytime soon. Apple (AAPL), in particular, is poised to join ETFs that select from the U.S. Dividend Achievers Index within the next year, while the company will have to wait until 2037 to meet NOBL's requirements for entry.

That may be helpful knowledge if you're considering the ETF, though. There remain some, albeit few, opportunities for those looking to pick individual stocks at reasonable prices, and that's where I hope this article will add value. This article has four sections:

• A snapshot of all securities, including beta, yield, and dividend growth rates
• The periodic returns for all securities
• A yield distribution analysis to help identify deep-value stocks
• A financial health assessment for each security

NOBL Performance History

Before I get into the details, let's take a closer look at the fund and how it compares against the S&P 500 and its large-cap-dividend ETF competitors. The table below shows the performance of NOBL and SPY along with the Invesco S&P 500 Equal Weight Index ETF (RSP).

Source: Portfolio Visualizer

As shown, it's underperformed SPY by 2.36% per year. Some is due to higher fees, and this explains almost all of the underperformance relative to RSP. The latter is probably the more relevant comparator, as NOBL is an equal-weight ETF, too.

The table below shows how NOBL has stacked up against the best 15 other ETFs in the Large-Cap Dividend category. The 100.95% works out to be an annualized 14.98% assuming reinvested dividends, but it's clear investors would have been better off with funds like the WisdomTree U.S. Dividend Growth ETF (DGRW) or the iShares Core Dividend Growth ETF (DGRO). These ETFs also have a market beta below one and similar yields. A key difference is that the requirements for years of consecutive dividend growth aren't nearly as strict as NOBL's.

Source: Created By Author Using Data From Seeking Alpha And Portfolio Visualizer

NOBL Top Holdings And Sector Exposures

Since NOBL is an equal-weight ETF that rebalances quarterly, the current top holdings are merely the best performers since the last rebalancing date. The top 15 are below.

Source: ProShares ETF Overview

NOBL is also heavily overweight the Industrials and Consumer Staples sectors, which combine to total over 43% of the fund. Some sectors performing well lately, like Energy and Technology, don't play a significant role.

Source: ProShares ETF Overview

Part of the reason for NOBL's persistent underperformance can be traced to these sector allocation differences. The overweighting of the Industrials sector was a wash in the last five years, as the returns for the Industrial Select Sector SPDR ETF (XLI) has, more or less, matched NOBL's. The overweighting in Consumer Staples has been a significant drag, with five-year returns for the Consumer Staples Select Sector SPDR ETF (XLP) off by nearly 50% compared to NOBL's. The exposure to Energy stocks is roughly the same in both NOBL and SPY, so that leaves us with Technology. The table below shows the Technology Select Sector SPDR ETF (XLK) returning 263.64% in the last five years, and NOBL is underweighting this sector by nearly 25%. In my view, dividend investors ignore Technology stocks at their peril; indeed, many are probably overvalued, but they are in far better shape financially than they were in the early 2000s when the dot com bubble burst. With that in mind, NOBL isn't appropriate on its own - some exposure to this sector, perhaps through one of the other dividend ETFs listed above, is warranted.

Source: Created By Author Using Data From Seeking Alpha And Portfolio Visualizer

NOBL ETF Snapshot

Below is a snapshot of each of the 65 S&P 500 Dividend Aristocrats, sorted by sector for comparison purposes. Each security's beta, number of consecutive dividend growth years, forward dividend yield, and five-year dividend growth rate metrics are included.

Source: Created By Author Using Data From Seeking Alpha and iO Charts

First, note how the average five-year beta of 0.92 is almost identical to the ETF's beta of 0.91. It doesn't always work out this way, particularly if an ETF has a high turnover. This won't be an issue with this fund, though, due to the strict dividend growth requirement. Some investors may view this positively since you know upfront what you're getting into and can use price technicals with a little more reliability.

The 43 years of consecutive dividend growth isn't surprising, but I question how many years dividend growth investors should seek. I think ten is plenty, or perhaps looking at dividend growth history during recessionary periods is safer. Either way, 25 seems excessive.

The average yield is 2.41%, and for ETF investors, you'll need to factor in the 0.35% expense ratio. These days, it seems 3% is the approximate minimum to be considered a high-yield stock, and I counted just 16 stocks that meet this threshold. They include AT&T (T), Kimberly-Clark (KMB), and Walgreens Boot Alliance (WBA). The S&P 500 Dividend Aristocrats aren't a high-yielding bunch, but they're all about consistency. Seeking Alpha currently has an A- or better Dividend Consistency Grade for 59/65 stocks.

Finally, I want to mention that the average five-year dividend growth rate of 7.65% may seem good, but this rate is a few percentage points behind the average S&P 500 dividend-paying company. Again, I believe this is traced to the 25-year requirement. Younger companies that are growing sales and earnings can also afford to increase their dividends at a fast rate. In contrast, mid to high single-digit growth appears the norm for these mature companies.

Periodic Performances & Attribution

In this section, I will look at the short- and mid-term returns for each stock. In the tables below, you can see that the average stock gained 6.04% in October, which is pretty much in line with the ETF's return.

Source: Created By Author Using Data From Seeking Alpha and Portfolio Visualizer

A. O. Smith (AOS) gained an incredible 20.12% in October after reporting record earnings for Q3 2021, with management also raising full-year revenue and EPS guidance. Another company in the Industrials sector, W.W. Grainger (GWW), also exceeded earnings expectations for Q3, with the stock gaining 17.82% last month. Only ten stocks were in the red, and eight were in the Health Care and Consumer Staples sectors. These included Sysco (SYY), Medtronic (MDT), and Cardinal Health (CAH).

A performance attribution analysis separates a fund's asset allocation effect (excess returns generated from sector exposure differences) and its security selection effect (excess returns caused from stock selections against sector peers). For last month, here are the primary reasons for the results:

1. The net asset allocation effect was -0.20%. As mentioned, NOBL is underweight Technology by nearly 25%, and XLK gained 8.18% in October. This was partially offset by an overweighting in the Industrials sector, whose SPDR sector ETF gained 6.80%, and an overweighting in Consumer Staples by nearly 13%, whose SPDR sector ETF gained 3.80%.

2. The net security selection effect was -0.93%, with IBM's -9.95% return contributing to 0.55% of NOBL's underperformance. Another source of underperformance was in the Consumer Cyclicals sector, contributing to 0.43% of the underperformance. While all seven stocks were in the green and averaged 8.08%, they still lagged the Industrial Select Sector SPDR ETF by 4.01%. Blame McDonald's (MCD) and labor problems for its relatively small 1.84% gain on the month.

Yield Distributions

In my view, buying a stock based on its relative historical yield makes sense for consistent dividend payers like the S&P 500 Dividend Aristocrats. The reason is that dividend cuts won't be the reason for a drop in yield - a price increase will be. In this way, it's a simple form of value investing so long as you have a lot of patience. Certainly, in this market, you shouldn't expect to score big on a deep-value play in just a few short months.

I've put together a table for each stock's five-year dividend yield distribution. For example, the 4.11% yield for Consolidated Edison (ED) is higher than it's been 82.54% of the time in the last five years. I've sorted the stocks in order from most attractive to least attractive based on this metric.

Source: Created By Author Using Data From Seeking Alpha and Portfolio Visualizer

This is one way to see how expensive equities are these days since even value stocks like these have relatively low yields and, thus, high prices. Chevron (CVX) and Exxon Mobil (XOM) still have high yields relative to their five-year averages, though, so for dividend investors bullish on Energy and looking to use commodities to hedge, these may be good choices.

Financial Health

I caution against using yield alone to make investment decisions; when possible, it should be backed by a fundamental analysis of the company, including their financial health. My preference is for constituents to have good operating cash flows and manageable debt levels, relatively low payout ratios, plus a decent revenue growth rate to support future dividend increases. The table below looks at some of these metrics.

Source: Created By Author Using Data From Seeking Alpha

As shown, the majority have low cash to debt ratios, which is problematic. For context, the First Trust Rising Dividend Achievers Index ETF (RDVY) requires this ratio to be above 50%, and it's also a factor in top-performing funds like SCHD and DGRO. This threshold is only met by 20 of NOBL's constituents, and of these 20, only six have a double-digit forward revenue growth rate:

• Target (TGT): 10.77%
• T. Rowe Price Group (TROW): 13.55%
• West Pharmaceutical Services (WST): 18.55%
• Expeditors International of Washington (EXPD): 15.55%
• Pentair (PNR): 10.20%
• Nucor (NUE): 13.05%

Performance has been there as a result, with each beating NOBL's 35.33% return over the same period. NUE is the positive outlier, but even the remaining five have averaged a 57.70% return.

NOBL's median cash to total debt ratio is only 36.43%, and its median forward revenue growth rate is just 5.13%. Therefore, I'm not convinced the ETF will substantially outperform in a correction. If history is any guide, it'll still do better than SPY, but for investors expecting a lot of downside protection, I think they'll be disappointed.

Investment Recommendation And Conclusion

With each review, I am reminded of the structural flaws of the S&P 500 Dividend Aristocrats Index that won't be solved anytime soon, specifically, the lack of Technology stocks in the Index. Using NOBL as an alternative to SPY may have made sense 10 or 15 years ago, but it doesn't today. The big Technology stocks today are cash-flow generating machines and not speculative investments like they once were. Betting against the sector is risky, so at most, NOBL should only be one of several dividend ETFs in your portfolio.

Opportunities for buying at deep discounts are few and far between, but then again, you can say that about most equities. I believe there to be a strong link between the cash to total debt ratio and share price performance, so I suggest looking at that metric first. One thing that NOBL has going for it is a high allocation to the Industrials sector, which has many names over the 50% threshold. It's a good sector to be in if you're looking to manage some risk, and cherry-picking some stocks like EXPD could be the best path forward, even if they look expensive.

Generally speaking, though, NOBL's constituents continue to be in relatively poor financial health. I would not recommend buying this ETF today. High quality matters more than dividend consistency in risk management, and too many of these 65 companies simply don't have it.

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