Swedroe: What’s In A Fund Name?

Swedroe: What’s In A Fund Name?

The factor mentioned in the fund name may not be what you’re getting.

Reviewed by: Larry Swedroe
Edited by: Larry Swedroe

My last ETF.com article was on dividend-growth strategies. One of its findings was that the returns to dividend-growth strategies were well-explained by their exposures to common factors, particularly the quality factor.

With that in mind, I decided to see how the exposures of the two dividend-growth ETFs we examined—the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and the Vanguard Dividend Appreciation ETF (VIG)—regarding the quality factor compared to the exposure regarding the quality factor of the iShares Edge MSCI U.S.A. Quality Factor ETF (QUAL), a fund that directly targets the quality factor.

The finding provides an important lesson for investors: You cannot rely on a fund’s name. What I found was that both NOBL and VIG had greater exposure to the quality factor than QUAL. Using Portfolio Visualizer’s regression tool, for the period August 2013 through March 2019, QUAL’s exposure to the quality factor was just 0.15, well below that of the 0.34 and 0.35 exposures, respectively, of the two dividend growth funds.

Fund Data

The table below shows the factor exposures for QUAL and allows for a comparison with NOBL and VIG. Note that the returns of all three funds are well-explained by their exposure to common factors.



We can also look at the returns and volatility of the three funds. Using the backtest portfolio tool at Portfolio Visualizer, we find that over the period November 2013 through March 2019, VIG returned 10.3% (standard deviation of 10.7%), NOBL returned 11.0% (standard deviation of 10.5%) and QUAL returned 11.8% (standard deviation of 11.0%). Again, we find nothing special about the performance of dividend-growth strategies.

The important lesson for investors is that, before you invest, you need to make sure the construction rules of the fund you are considering result in the amount of exposure to the factors you are seeking—as those exposures will determine the vast majority of the risk and return of the fund.

And, as the above example demonstrates, you cannot rely on a fund’s name to provide sufficient information to make that determination. You need to take a deep dive under the hood to be sure you are getting the exposures you desire.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 130 independent registered investment advisors throughout the country.

Larry Swedroe is a principal and the director of research for Buckingham Strategic Wealth, an independent member of the BAM Alliance. Previously, he was vice chairman of Prudential Home Mortgage.