The Expectations Behind Investment Labels

What’s in a Name?

We’re not talking about people; we’re talking about investments. And in the world of investing, names carry weight. If a fund has “growth” in its name, you naturally expect it to hold growth-oriented stocks (companies that reinvest earnings to expand rapidly). If the name is Utilities Select Sector Fund, you’d reasonably assume the portfolio is dominated by utility companies. And in that case, you’d be right; the top holdings are indeed utilities.

But what happens when a fund’s name includes the words “dividend” and “value”? Most investors tend to make two assumptions:

• The portfolio holds dividend-paying companies.
• The fund offers a yield higher than the overall market.

And often, there’s a third implicit expectation: you will likely be trading off some capital appreciation in exchange for income. The name of a fund sets expectations, but as with most things in investing, what’s under the hood matters more than the label on the box.

What You See Isn’t Always What You Get

The Capital Group Dividend Value ETF (CGDV) gives you an initial impression of a conservatively oriented, income-focused fund. Something with an emphasis on dividends. Is this what you get with this fund? The first problem is that most investors don’t even really know what they own, and if performance is good, they may not even care.

CGDV launched in 2022, so the track record is short. Yet in that brief time, it beat the S&P 500 by 22% and outperformed the S&P 500 Value Index by 38%. On the surface, it seems like excellent management, but looking under the hood tells the story.

If you’ve been tracking the stock market, you’re well aware that Nvidia and Microsoft have delivered stellar performance over the past few years. But does that make them value stocks? That depends—every investor defines “value” differently, and there’s no universally correct answer. The concept of dividends adds another layer of subjectivity. While dividend yield and value are often linked in investors’ minds, the presence of a dividend doesn’t necessarily imply an attractive yield. Still, when a fund is marketed with “dividend” in its name, many investors (myself included) expect at least a moderately appealing payout.

CGDV seems to stray from delivering value or a higher yield. Its top two holdings are Microsoft, yielding 0.6%, and Nvidia, offering a mere 0.02%. Together, these two stocks make up 12% of the fund, just a few percentage points shy of their combined weight in the S&P 500. The fund’s overall yield stands at 1.3%, slightly above the S&P 500’s 1.1%, but hardly generous for a dividend-focused strategy.

The Capital Group Dividend Value ETF was mentioned in the August 18th edition of Barron’s as a dividend fund that is “crushing the market.” Crushing the market is accurate, but calling it a dividend fund seems a little deceiving. Nobody calls the S&P 500 a dividend fund.

This is not a knock on the fund, but it is a caution about labels. It is easy to beat your peers when you are not playing by the same rules. Indexes that track both the value and dividend sectors have lagged the S&P 500 over the past year. If you’re buying CGDV for the long-term benefits traditionally associated with value and dividends, you may be in for a surprise if growth falls out of favor.

Observations on the Market No. 410