Possibly a controversial topic ;)

In the last few days I've been writing more and more in the comments here that I don't think ETFs like Fidelity Global Quality Income are so great, at least for young people. So that I don't have to write the same thing over and over again, I'm going to write a post.

As many of the ETFs compared here have only been around for 5-7 years, I can unfortunately only make a comparison of performance over 5 years. That's quite short, I know. However, it is good in that we had two difficult years. Apart from the fact that, as a young person, I would only consciously choose a distributing ETF if I were planning my portfolio for retirement, for example, I have now also chosen the distributing variant of the standard ETFs here for better comparability.

My opinion is that anyone with a long investment horizon will get the best return and probably even the best payout if they choose a standard ETF.

The others are suitable as an add-on or main ETF as soon as you reach a certain age (and retirement is just around the corner) or you have a lot of capital and want to live off the dividends.

Now for an overview (source: Morningstar)

$HMWO (-0,06%) MSCI World dist

Performance 5 years: 13.11% p.a.

Last 12-month distribution: 1.41% p.a.

Simulation, investment today 100,000 euros, 30 years with the performance assumed above (note: this is too high and is not intended to suggest that you could achieve this safely. The performance over a longer observation period is worse p.a.)

Result: approx. 4,000,000 euros

Distribution, assuming that it (the div yield) remains constant: EUR 56,400

$VWRL (-0,19%)
FTSE All world dist

Performance 5 years: 11.63% p.a.

Last 12-month distribution: 1.28% p.a.

Simulation, investment today 100,000 euros, 30 years with performance assumed above

Result: approx. 2,700,000 euros

Distribution, assuming that it remains constant: 34,500 euros

Incidentally, this again shows my general problem with the AllWorld compared to the MSCI world... When does it ever perform better? How often have EM outperformed DM?

To colleagues with an investment horizon > 30 years => Do you really want to leave 1.3 million euros lying around?

$FGEQ (-0,35%)
Fidelity Global Quality

Performance 5 years: 11.07% p.a.

Last 12-month distribution: 2.2% p.a.

Simulation, investment today 100,000 euros, 30 years with the performance assumed above

Result: approx. 2,300,000 euros

Distribution, assuming that it remains constant: 50,600 euros

Insight: I have considerably more capital with the MSCI World and potentially a higher dividend.

But: It is true that the 5-year dividend growth is higher with Fidelity than with the MSCI World dist, and not insignificantly so. It is therefore more likely that Fidelity will be able to keep its dividend payout constant than the MSCI World. However, the difference in capital of over 1.5 million euros is very significant.

However, it should be noted that this ETF effectively takes the MSCI World, then filters according to quality aspects (there is also the $IS3Q (+0,13%) which also performs better) and then filters by distribution. The amount of the distribution is at most relevant for the weighting. Or how else can you explain the fact that NVIDIA, the dividend stock par excellence (irony), has a not-so-small position in the ETF? And please don't tell me about dividend growth: Yes, it's great for NVIDIA, but when will I receive a distribution that isn't 0.03%? In 80 years? What I'm trying to say is that the ETF doesn't really have a dividend approach. It has a nice payout ratio and nice dividend growth, but it doesn't generate this by buying stocks with a real dividend focus. You can find that good or bad.

$GGRP (+0,37%) WisdomTree Dividend Growth:

Performance 5 years: 7.34% p.a.

Last 12-month distribution: 1.57% p.a. (reduced)

Simulation, investment today 100,000 euros, 30 years with the performance assumed above

Result: approx. 830,000 euros

Distribution, assuming that it remains constant: 13,000 euros

Why do I still think it's a good addition: it brings a few defensive companies into the portfolio or gives them a higher weighting. Depending on market expectations, this can therefore be a good addition.

In contrast to Fidelity, it also has a significantly different approach to the MSCI World, for example.

$VHYL (+0,47%)
FTSE All world High Div Yield

Performance 5 years: 7.62% p.a.

Last 12-month distribution: 2.97% p.a.

Simulation, investment today 100,000 euros, 30 years with performance assumed above

Result: approx. 900,000 euros

Distribution, assuming that it remains constant: 26,730 euros

$TDIV (+0,06%) VanEck Morningstar HighDiv

Performance 5 years: 11.07% p.a.

Last 12-month distribution: 3.98% p.a.

Simulation, investment today 100,000 euros, 30 years with the performance assumed above

Result: approx. 2,300,000 euros

Distribution, assuming that it remains constant: 91,540 euros

Now that's a dividend ETF to be proud of. It performed comparatively well in 2022 in particular, unlike the others. This is precisely what makes it interesting as an add-on.

It has a focus on finance.

It is by no means a stand-alone ETF, but in my view it is a great alternative as an addition to generate dividends.

(5Y DivGrowth 7.5%, lies between MSCI World and Fidelity)

____________________________________

Conclusion: In terms of the capital generated, the MSCI World is without doubt the best choice. With regard to the distribution, it is not possible to make such a general statement. In any case, there is no conceivable scenario in which I would choose Fidelity over the MSCI World for a long-term investment horizon and capital accumulation - not management. I simply leave so much capital lying around...

My recommendation for beginners is therefore:

MSCI World, about 70-80%, distributing or accumulating depending on your goal

A small engine (more on this in a moment), approx. 20-30%

For more experienced investors with a dividend target:

MSCI World, dist, approx. 50-60%

VanEck, approx. 15-20%

Motor, approx. 20-30%

I would go for Fidelity if I either have capital and can live off dividends, or if I'm approaching retirement and want to supplement it:

Fidelity instead of MSCI world: 80%

VanEck: 20 %

(Motor, only in the first case: capital to live off distributions and at the same time still aiming for further wealth accumulation)

About the engines:

Of course, the Nasdaq comes to mind and I would go for it in principle. I would also prefer it to the MSCI World IT because, contrary to popular belief, the Nasdaq is not limited to technology. It currently also includes a number of companies from the consumer discretionary and consumer staples sectors, for example. Nevertheless, its performance is of course extremely convincing. I wouldn't care about overlaps with the MSCI world, as they probably wouldn't lead to any company suddenly having a 10% portfolio share or anything like that.

And then I recently dug up something else: $LAB2 (-0,72%)

Unfortunately, it hasn't been around that long, but the index has been around for 7 years and in these 7 years the index has had a performance of 14.78% p.a., unfortunately no statement for 5 years (Nasdaq in 5 years: 21.62%). So it turns out that it can't keep up with the Nasdaq, but it is not quite so technology-focused and not limited to the USA. I bought it myself because it offers an excess return over the MSCI World and at the same time includes companies that were not previously in my portfolio and shifts my weighting.

The fund invests in strong brand values.

However, because it does not generate such a strong excess return as the Nasdaq, it is not really an engine in the classic sense, but perhaps suitable for a more conservative approach.

PS: The S&P 500 is not included in the overall comparison because all the others have a global approach. That would be somewhat unfair. Of course, its performance is significantly better.

-No investment advice

Smart Beta ETF

Part 1 What is Smart Beta & Quality ETF

Reading time: 8-10 minutes

Table of contents

• What is a smart beta ETF?
• Categories of Smart Beta ETF?
• Z-Value
• Methodology Quality ETF
• Conclusion and outlook

Disclaimer: No investment advice or recommendation, this article is for information purposes only. Before you decide on an ETF, take a closer look at it in terms of positions, sampling, regions, etc. I can't describe everything here as it would go beyond the scope of this article.

What are smart beta ETFs?

To understand smart beta ETFs, it is first important to know what "beta" is. Beta is a financial ratio that measures how much an asset/share (or a group of shares) fluctuates in relation to the underlying market. Simplified: if the German stock market has a volatility of 16 % and the DAX of 10 %, then the beta is 1.6.

The reference value for the beta is therefore the market. For "normal" ETFs, the beta should be close to 1, as the iShares Core MSCI World ($IWDA), for example, attempts to replicate the MSCI World Index and both are weighted according to market capitalization (not quite 1 due to tracking difference).

In contrast, smart beta ETFs attempt to achieve a higher return or lower risk (volatility) by selecting a different stock from the underlying market capitalization-weighted index (beta), e.g. by equal weighting or applying certain parameters such as price/earnings ratio or price/book ratio.

In addition to smart beta, there are also terms such as "tilt" or "enhanced" for this "smart" stock selection, i.e. the determined over- or underweighting of various characteristics.

Smart beta ETF categories

Roughly speaking, smart beta ETFs can be divided into the following categories:

• Quality (approx. 12 billion invested volume)
• Value (approx. 12 billion invested volume)
• Low Volatility (approx. 8 billion invest volume)
• Momentum (approx. 4 billion invest volume)
• Multi-factor
• Growth & Small-Cap (approx. 12 bn Investvol)
• Dividend (approx. 16 bn Investvol.)
• Equal-Weight

Even if one or the other strategy has been mentioned several times before, it is surprising that the investment volume of all smart beta ETFs is lower than that of the $IWDA (-0,09%) (EUR 73 bn)

So what is the approach behind the individual smart beta ETFs and could this present an interesting investment opportunity? To find out, let's take a look at the individual tilts and their methodology.

The Z-value

In order to understand the methodology of Smart Beta ETFs, it is necessary to deal with the so-called Z-value, as MSCI in particular seems to have fallen in love with this parameter for its Smart Beta ETFs.

The Z-value is a figure that shows the number of standard deviations of a data point (e.g. P/E ratio) from the mean value. In this respect, it is a ratio that compares the key figure of an individual stock with the key figures of all stocks in the index.

Simplified example based on P/E ratio

Share A: 10

Share B: 15

Share C: 20

Share D: 50

Mean value: 24

Standard deviation: 15.67

Z-value A: -0.88 (read: P/E ratio of 10 is 0.88 standard deviation below the mean)

Z-value B: -0.56

Z-value C : -0,24

Z-value D: 1,69

If the ETF now wants to overweight shares with a low P/E ratio, for example, it would weight the shares with the lowest Z-value higher.

If you are still stumped by this example - like a clumsy fireman - we recommend the following video:

z-Standardisierung (z-Transformation)- Einfach erklärt - DATAtab

Now to the individual categories, each showing a selection of the largest ETFs:

Quality ETF

Overweighting of companies with solid fundamental indicators such as high return on equity, stable earnings growth and low debt.

💰 Z-Score MSCI Quality ETF

There are 4 larger ETFs with the same methodology but focusing on different regions (TD = tracking difference):

• $IS3Q (+0,13%) (World | TER 0.30 % | TD 0.10 % | 3.5 bn Invest | 3Y outperformance vs World + 1,5 %.)
• $IUQF (-0,27%) (World | TER 0.25 % | TD 0.04 % | 1.7 bn | 3Y outperf. vs. world + 1,7 %.)
• $XDEQ (+0,2%) (USA | TER 0.20 % | TD n.a. | 1.9 bn | 3Y outperf. vs. S&P 500 + 0,3 %.)
• $IEFQ (+0,52%) (Europe | TER 0.25 % | TD 0.0 % | 3Y underperf. vs. Eurostoxx 600 - 4,1 %).

Index methodology:

• The ETFs are based on respective "parent indices", e.g. the MSCI World.
• In the first step, the variables are named for the quality ETF:
• Return on equity (12-month earnings per share [EPS] / latest book value per share [BVPS])
• Leverage ratio (total debt / book value)
• Stable earnings growth (measured by variability [standard deviation] of y-o-y eps for the last 5 years)
• The Z-value (see above) is determined for each share for the individual key figures
• Extreme values are then eliminated
• The Z-values are then added together for each share
• The shares with the highest total Z-scores are included in the ETF
• Rebalancing takes place every six months

On a site note: if you want to save some TER, you can use the Xtrackers ETF, these are usually 0.05% TER cheaper than the iShares counterpart with a similar tracking difference & are based on the same index & calculation logic.

💰 Wisdom-Tree-Quality-ETF

Track dividend payers with higher growth prospects at the same time

• 
  $GGRG (+0,34%) (World | TER 0.38 % | TD 0.32 % | 0.7 bn | 3Y Underperf. vs. World -2 %.)
• 
  $DGRG (-0,14%) (USA | TER 0.33 % | TD 0.02 % | 0.4 bn | 3Y outperf. vs. S&P 500 + 7,1 %.)

Index methodology:

• Variables:
• Growth factor: based on expected earnings growth (expectet eps)
• Quality factor: based on the last 3 years return on equity (ROE) and return on assets (ROA)
• Stability factor: earnings per share (EPS) must be higher than dividend per share (DPS)
• Exclusion criterion: Companies that do not meet Wisdom-Tree's ESG criteria are excluded
• Weighting: After the variable filter, the companies in the index are weighted according to the annual dividends paid
• Rebalancing takes place every six months

💰 Invesco RAFI Index:

• $PFT (-0,03%) (USA| TER 0.39 % | TD 0.33 % | 0.5 bn | 3Y underperf. vs. S&P 500 - 2,7 %.)
• $PEH (-0,31%) (EM | TER 0.49 % | TD n.a. | 0.04 bn | 3Y Outperf. vs. Emerging Markets IMI + 10,8 %.)

Index methodology:

• Variables:
• Cash flow, sales & dividends: Weighting from average values of the past 5 years and current book value
• The index weights are determined in proportion to the fundamental values of the companies. Calculation: fundamental values / market-capitalized free-float values.

Conclusion on the Smart-Beta Factor Quality

In the first part of this series, we looked at quality ETFs. The smart component consists of screening the stocks contained in the "parent index" according to quality factors such as earnings growth, leverage, book value, etc. and weighting them on the basis of their relative strength compared to the other stocks contained in the index.

If you want to track the world index, I would recommend the $XDEQ (+0,2%) However, the difference to the normal MSCI World is not so great that one could speak of real diversification.

I also find the smart beta approach exciting in order to set the focus of the smart beta ETFs differently on geographically different markets (e.g. USA Large CAP/Momentum, Europe: USA Large CAP/Momentum, Europe: Small CAP & Growth, Emerging Markets: Quality & Value). Unfortunately, the only Emerging Markets Quality ETF has a very low investment volume of only around EUR 40 million. Those for whom this is not an obstacle are welcome to take a look at the $PEH (-0,31%) as it has clearly outperformed the MSCI Emerging Markets and, in my view, quality factors can make good use of their opportunities, especially in such markets.

In the next parts, we will look at the other classes of smart beta investing - stay tuned!

Many users here are rightly enthusiastic about dividend growth ETFs.

The most popular are probably:

Fidelity Global Quality Income $FGEQ (-0,35%) and

WisdomTree Global Quality Dividend Growth $GGRG (+0,34%) / $GGRP (+0,37%)

On extraetf.com and finanzfluss.de you can find these under the investment strategy - dividends.

Which is understandable at first glance, but unfortunately only half the truth.

What you are actually buying here is the quality factor, but this does not appear under Fundamentals / Quality.

What is the quality factor?

The quality factor is part of an investment strategy that selects high-quality companies. The criteria for this factor can be "hard" (e.g. return on equity and free cash flows), but the application of this factor can also be based on "softer" criteria such as the quality of management, corporate governance and market position.

If you want to apply this to an index, you take an investment universe (e.g. the MSCI World) and place one or more filters over it that exclude all stocks that do not meet the criteria.

The remaining stocks can then either be sorted according to market capitalization/balances or other criteria can be added.

Let's take a look at what the target investment objective of the MSCI World Sector Neutral Quality Index is:

"The MSCI World Sector Neutral Quality Index captures large and mid-cap representation across 23 Developed Markets (DM) countries*. The index aims to capture the performance of securities that exhibit stronger quality characteristics relative to their peers within the same GICS® sector by identifying stocks with high quality scores based on three main fundamental variables: high Return-on-Equity (ROE), low leverage and low earnings variability."

In simple terms, this means that as much as possible should flow back to shareholders (through dividends or share buybacks), attention should be paid to sales growth and debt should be low.

These are virtually the prerequisites for sustainable dividend growth.

As all 3 ETFs (Fidelity Global Quality Income, WisdomTree Global Quality Dividend Growth and iShares / Xtrackers MSCI World Quality) invest in shares with similar characteristics and these overlap to some extent, it is no wonder that they also perform very similarly.

https://extraetf.com/de/etf-comparison?products=IE00BYXVGZ48-etf,IE00BP3QZ601-etf,IE00BZ56SW52-etf

It should be mentioned that the WisdomTree Global Quality Dividend Growth differs the most from the other two in terms of its composition. But with 589 stocks, it also holds twice as many stocks as the Global Quality Income or MSCI World Quality. And it also includes momentum screening.

Index Description:

"The index is rules-based, fundamentally weighted and is comprised of high quality dividend[1]paying companies from global developed markets, risk-filtered using a composite risk score ("CRS") screening, which is made up of two factors (quality and momentum), each carrying an equal weighting."

So the WisdomTree Global Quality Dividend Growth is only secondarily a dividend ETF.

It is actually a multi-factor ETF with a dividend filter.

To summarize, what is being done here is simply factor investing with extra steps and you could just as well use the cheaper MSCI World Quality $IS3Q (+0,13%) / $XDEQ (+0,2%) as well.

Gerd Kommer is proud of you. 😘

Pro tip: there is no MSCI Emerging Markets Quality ETF in Europe, but for the reasons described above you can buy the Fidelity Emerging Markets Quality Income

$FYEQ (+0,02%) as a proxy for the reasons described above.

(Edit: I use this myself $PEH (-0,31%) )

$IS3R (-0,18%) Momentum 0.3TER

$IS3Q (+0,13%) Quality 0.3TER

$IWVL (+0,33%) Value 0.3TER

$IWDA (-0,09%) World 0.2 TER

According to MSCI, the Momentum and Quality ETFs perform better than the World ETF. The positions are smaller and more concentrated than in the World ETF.

A world option for you?

What do you think?

Since I don't own an ETF and otherwise hold quality stocks, I can well imagine a momentum ETF as an addition.

But I'm not sure whether I would choose one of the ETFs if I only had to bet on a single ETF.

Subsequent purchase

Pensions deposit