This article was published on Dividend Kings on Monday, June 12th.
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As part of my mission to create the ultimate family sovereign wealth fund perpetual charitable trust for my family, I am building out a list of world-beater dividend ETFs.
The Best ETFs I've Ever Found
Strategy Ticker Yield Growth Total Return Deep Value COWZ 2.1% 14.5% 16.6% Multi-factor/economic cycle OMFL 1.6% 10.1% 11.7% Aristocrats/Future Aristocrats VIG 2.0% 11.3% 13.3% Core growth SCHG 0.5% 13.5% 14.0% Super (deep value, high quality) GARP (Growth at a reasonable price) SPGP 1.2% 14.2% 15.4% High-yield blue-chip SCHD 3.8% 7.6% 11.4% Average 1.9% 11.8% 13.7%
(Source: Morningstar)
I've linked to articles introducing each of these ETFs.
Note the fundamentals of these six ETFs are absolutely fantastic. While the yield is not much better than the S&P's 1.7%, the growth and long-term return potential is better than the Nasdaq's 37-year return of 13.5%.
The Nasdaq's yield? 0.8%, so we're talking about an aristocrat-like yield, with better than Nasdaq-like returns, with zero stock picking.
Historical Returns Since 2017
Better than market returns? Check. Better negative-volatility-adjusted returns (Sortino ratio)? Check.
Average annual-rolling return of 14%, just like analysts expect in the future? Check.
Far superior rolling returns than the S&P? Check.
18% Annual Dividend Growth Since 2018
18% annual dividend growth since 2018 compared to 7.4% for the S&P 500.
Can you see why I'm so excited about these six world-beater dividend ETFs?
But in order to have the best long-term portfolio, my family's hedge fund and Dividend Kings' ZEUS Income Growth portfolio needs the best of the best.
- 33% of the best ETFs
- 33% of the best hedges
- 33% of the best world-beater blue-chips
That's why I'm always hunting for new world-beater ETFs, the crème de la crème of the ETF world.
Strategies and execution are so good that I cannot just recommend them for readers and Dividend Kings Members but also potentially invest millions of my family's savings into them in the coming years and decades.
5 Star Growth ETFs Worth Considering
When a screen for growth (and value) finds some of my favorite world-beaters like OMFL, and COWZ, that's a good sign that we're on the right track.
Today I wanted to share with you an introductory analysis of two world-beater ETFs that aren't just good; they are potentially life-changing 5-star gold-rated great.
JPMorgan US Quality Factor ETF (JQUA): A Superior Alternative To The Russell 1000 And S&P 500
Consider this wonderful core ETF if you want to own a superior version of the S&P 500.
This ETF's gold rating means that Morningstar's analysts are extremely confident it will beat its peers long-term.
- Its strategy and execution are rock solid
And its 5-star rating means that it's in the top 20% of its peers historically.
This ETF has been in the top 9% of its peers over the last five years and, when factoring in taxes, is in the top 5%.
- Out of 1,177 rival ETFs, it's in the top 59.
So what is this incredible gold-star 5-star strategy?
This is one of the three-factor ETFs JPMorgan has, all of which are designed to be low-cost ways to achieve superior returns to the Russell 1000.
- America's 1000 largest companies
JPMorgan takes the Russell 1000 sector weights and then applies the relevant screen for each ETF to find the best stocks for that particular sector.
Why use the same sector weights as the Russell 1000? Why not just take the 20% highest quality companies in the Russell? Because JPMorgan's goal is to outperform BUT also reduce tracking error or "market envy."
If you outperform over the long term but, while underperforming for a long stretch, become so frustrated you sell in disgust to chase performance elsewhere, the superior strategy is worth noting.
The key to JQUA's strategy is its specific quality screens.
It uses nine screens, looking at profitability, financial risk, and earnings quality. Eight of these are valid, while stock price volatility is not.
JPMorgan's 24-year strategy backtest outperformed by almost 3% per year or 43% per year compared to the Russell 1000, with lower volatility and almost twice the volatility-adjusted returns.
In other words, $1 invested in 1999 is now worth $4.37, while $1 invested in the Russell 1000 is worth $2.84.
That's a very solid strategy that Morningstar's analysts consider rock solid, and they have maximum confidence will continue to beat the Russell 1000 in the future.
What JQUA Owns
Since JQUA is designed to have identical sector weights to the Russell, you shouldn't expect much difference in sector weights. Like the Russell 1000, it's going to be a tech-heavy portfolio.
We're talking about world-beater-wide moat companies with fortress balance sheets, incredible returns on capital, very high free cash flow margins, and safe dividend payout ratios.
Top Holdings JQUA and Russell 1000
JQUA ends up owning approximately the top 25% of the Russell 1000 by its proprietary quality formula, with different weightings in the top few stocks. Specifically, it owns less MSFT and Apple than the Russell 1000.
The valuations are similar to the Russell 1000, while the historical growth rates are slightly superior.
Long-Term Return Potential & Historical Returns
The long-term return potential, according to Morningstar, is 1.5% yield + 10.2% growth = 11.7% CAGR.
That's superior to the S&P's consensus of 10.2%.
Historical Return Since 2017
Over the long term, this ETF is designed to slightly outperform the Russell 1000 with minimal tracking error (to minimize market envy).
So far, it's achieved just that. Slightly better returns, with lower volatility and smaller peak declines in the 2022 bear market.
Its negative-volatility-adjusted returns are 25% better than the Russell 1000.
And guess what? The 0.12% expense ratio is 0.03% lower than IWB's 0.15%.
Better returns, better volatility-adjusted returns, and at a slightly lower cost.
JQUA's Downsides
The biggest obvious downside to JQUA's strategy is that it begins with the goal of minimizing Russell 1000 tracking errors. While understandable, it does limit how much of a boost the quality factor can give it.
ETFs like COWZ are also single-factor focused (value) and, by not using sector caps, are able to achieve truly astonishing fundamentals (a PE of 7 and FCF yield of 13%, for example).
JQUA has a relatively low turnover but is much higher than Russell due to its strategy of quality screening and rebalancing every quarter.
Because it's using nine different quality screens, the top 20% in each sector are naturally going to shift around, resulting in higher turnover.
- Russell 1000 has a 5% annual turnover.
What is the difference? Long-term IWB's tax cost ratio is 0.46% while JQUA's is 0.63%.
But at the end of the day, JQUA creates a superior (and lower cost) version of the Russell 1000. One that is expected to deliver superior long-term returns and beat the S&P 500 by approximately 1.5% per year.
- 56% better inflation-adjusted returns over 30 years
Cambria Shareholder Yield ETF (SYLD): One Of The Best ETFs You've Never Heard Of
SYLD is an ETF so great I'm not just recommending it; I'm adding it to the DK ZEUS ETF list, meaning my family's sovereign wealth fund and charitable trust.
The expense ratio is relatively high at 0.59%, but this is an actively managed ETF, and the extra fees are very well worth it.
One of Cambria ETF's most notable selling points is its favorable fees for open-end and exchange-traded funds, signifying a dedication to investor interests. The firm's fees across their funds, on average, land in the lowest quintile of peer strategies. Portfolio manager turnover at Cambria ETF has been low over the past five years, building confidence that the firm is working to establish a stable and engaging culture. - Morningstar
You have to compare apples to apples, and the expense ratio is actually in the bottom 20% of its peers.
Now look at the returns.
Over the last ten years, SYLD's absolute returns and tax-adjusted returns are in the top 1% of its peers (top 3 out of 267). How does it achieve that?
The Cambria Shareholder Yield ETF utilizes a quantitative approach to invest in US equities with high cash distribution characteristics. The initial screening universe includes stocks in the United States with marketing capitalizations over $200 million. The ETF is comprised of the 100 companies with the best-combined rank of dividend payments and net stock buybacks, which are the key components of shareholder yield. The ETF also screens for value and quality factors, including low financial leverage. - Cambria Funds
A quantitative approach means a rules-based algorithm decides what this ETF owns over time.
It's quality screened for valuation, quality, and fundamental safety (strong balance sheet) and ultimately seeks the best shareholder yield.
This leads to the fund's High People Pillar rating. Mebane T. Faber brings over 16 years of portfolio management experience to the table. Across strategies managed, Faber has an average Morningstar Rating of 3.4, indicating above-average risk-adjusted performance. Isolating the analysis to the fund at hand, Mebane Faber has delivered superior performance, outperforming both the category benchmark and average category peer for the past nine-year period.
This ETF is managed by Wall Street legend Meb Faber, famous for his prolific high-quality research and one of the most respected podcasts in finance.
In 2020 this ETF switched to active management, and since then, it's been in the top 2% of its peers, posting 22% annual tax-adjusted returns.
What SYLD Owns
If you're paying 0.59% for active management, you don't want something that basically mirrors a value ETF such as VTV.
That's definitely what you get with SYLD.
It's a high-energy, financial, and consumer discretionary-focused ETF, so nice and cyclical.
- what's the most undervalued today
- and what is likely to rip higher when the recession ends
8X earnings and 2.3X cash flow is one of the lowest valuation ETFs in the world.
And 13.6% long-term growth, according to Morningstar, is absolutely amazing.
- 16.0% long-term return potential, according to Morningstar
- vs. 13.7% ZEUS super ETF average
Historical Returns Since 2017
Now at first glance, you might wonder why I'm recommending an ETF that not only has underperformed the S&P but even underperformed other value ETFs like COWZ and VTV.
The answer? It's 14% to 15% long-term return potential from Morningstar.
What evidence is there that SYLD can deliver that kind of return?
There's the magic of deep value combined with quality from SYLD and COWZ.
Average annual returns of 17% per year vs. 15% for COWZ, which is running circles around the S&P and Vanguard value.
Here are the income growth rates for each of these value ETFs:
- Vanguard Value: 7.7% CAGR
- Pacer 100 Cash Cows: 12.3% CAGR
- Cambria Shareholder Yield: 20.1% CAGR
SYLD tripled the income growth of VTV and almost doubled that of COWZ.
Long-term Morningstar thinks it will be able to deliver around 14% to 15% income growth, about double that of VTV.
Why You Might Not Want To Buy This ETF
OK, but didn't I say that in 2020 they switched to active management? Yes, so let's confirm that these impressive returns have been maintained during that period.
Historical Returns Since Switching To Active Management (April 2020)
Did you know that Value has beaten the S&P since April 2020? I know; I was surprised too.
Because this is a deep value-focused ETF, it's returns since switching to active management have been decent, matching that of COWZ, but it has underperformed VTV and the S&P.
And since it's just three years, there is no rolling return data to smooth out bear markets to confirm that Meb Faber as an active manager, can continue achieving those 99th percentile magical returns.
The strategy has had volatile swings in returns, evidenced by a higher standard deviation, 26.9%, than the benchmark, 21.7%, over the five-year period. This added volatility contributed to mixed risk-adjusted performance, depending on the metric used.
The share class outstripped the index with a higher Sharpe ratio, a measure of risk-adjusted return, over the trailing five-year period. However, the share class proved ineffective as it could not generate alpha, over the same period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.
Despite the mixed risk-adjusted performance, the strategy came out ahead when risk was excluded. On a nine-year basis, this share class beat the category index on an annualized basis by 3.6 percentage points. It has also come out ahead of peers by an annualized 4.0 percentage points over the same nine-year period." - Morningstar
If you're OK with volatility and a 51% turnover ratio, SYLD is a potentially excellent deep-value growth ETF (super GARP).
"risk-adjusted" means volatility-adjusted, and deep value investing sometimes requires wild swings because it invests in cyclical companies.
Why I'm Adding Cambria Shareholder Yield To The ZEUS ETF List
Strategy Stock Yield Growth Total Return FCF Yield (Deep Value) COWZ 2.1% 14.5% 16.6% Multi-factor/economic cycle OMFL 1.6% 10.1% 11.7% Aristocrat/Future Aristocrat VIG 2.0% 11.3% 13.3% Core Growth SCHG 0.5% 13.5% 14.0% Quality Deep Value Growth (Super GARP) SPGP 1.2% 14.2% 15.4% High-Yield Blue-Chip SCHD 3.8% 7.6% 11.4% Max Shareholder Yield (Super GARP) SYLD 2.4% 13.6% 16.0% Average 1.9% 12.1% 14.0%
(Source: Morningstar)
Adding SYLD to the ZEUS ETF list improves the fundamentals to a 2% yield and 14.0% long-term consensus return potential.
- Added to Dividend Kings ETF Tracker this weekend
Am I willing to trust Meb Faber that his active management of this ETF is going to keep delivering that 5-star quality and performance? If Morningstar is willing to give him a 5-star rating, I am willing to put 1/7th of the ETF bucket into SYLD.
- 4.6% of my life savings
Year P/E 2013 13.7 2014 14.62 2015 12.47 2016 16.63 2017 16.37 2018 11.19 2019 10.51 2020 20.65 2021 8.77 2022 7.34 2023 9.01 2024 8.82 2025 8.12 10-Year Average 12.84 10-Year Median 12.51 5-Year Average 11.25 5-Year Median 9.76 12-Month Forward 9.60 Historically Overvalued -23.23%
SYLD is currently trading at a 23% historical discount to its normally low valuation strategy.
It's a potential table-pounding great buy for anyone comfortable with its risk profile.
Bottom Line: These Five-Star Dividend ETFs Could Change Your Life
If you're looking for a low-cost way to beat the market, then JPMorgan's Quality ETF is a great way to potentially earn superior returns to the S&P and Russell.
Just remember that this ETF is trying to provide a modest boost while basically owning the same sector weightings.
If you want Buffett-like returns from an ETF, you need one that uses a very different strategy than the market's, and that's where Cambria Shareholder Yield delivers the goods.
Using Meb Faber's expertise and proprietary screening criteria for value and quality, this deep value Super GARP ETF has historically delivered 16% average annual returns, and that's what Morningstar thinks it can keep delivering.
The key is the focus on quality and deep value, as if Ben Graham's "cigar butt deep value" strategy had a baby with Buffett's "wonderful company at a fair price" strategy.
Adding to the other six ZEUS ETFs creates the magnificent seven world-beater ETFs that Morningstar thinks can deliver around 14% long-term returns.
Total Returns Since 2017
At first, glance, adding SYLD doesn't seem to make the ZEUS ETF bucket better until we check the rolling returns, which smooths out the bear markets.
The average annual rolling return is increased slightly, as is the worst 3-year rolling return.
The Magnificent 7 ETFs: 1100 Of The World's Best Companies
What does owning all of the magnificent 7 ZEUS ETFs look like? Here's the answer using an equal weighting of 14.3%.
Note this is what my family's ETF bucket will look like when we next rebalance the portfolio. I'm using $2.5 million as a value placeholder (so Morningstar can run this analysis).
This is a high-quality, fast-growing value portfolio trading at 13.3X earnings. It's diversified across market cap and investing style. The PEG is just above 1, which is almost unheard of for an ETF. It's basically a Super GARP ETF bucket.
Plenty of growth but also plenty of cyclical value.
The nice thing about having a list of world-beater ETFs is that you can construct a core stock portfolio that meets any needs.
If that's your jam, you can overweight SCHD for yield or SCHG for core growth or any of the value ETFs.
And, of course, the blue-chip bucket is where you put your highest conviction individual stocks that you care most about.
The point is that ETFs are a great hassle-free way of investing in a strategy, not an individual stock.
It's a way to get the world's best companies working for you, even if you have no skill, time, or interest in picking stocks for yourself.
Remember that whatever strategy works best for you that gets you invested in the best-performing asset class in history do that.
It's better to be 80% perfect 100% of the time then 100% perfect 80% of the time.
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