Via SeekingAlpha.com

ETF Overview

Fidelity High Dividend ETF’s (FDVV) fund has not performed well since March 2020’s broader market selloff. Looking forward, FDVV’s portfolio construction approach that focuses on past information does not guarantee the sustainability of its dividends in the future. In addition, FDVV has a high exposure to cyclical sectors and these sectors may not perform well in the next few years due to the outbreak of COVID-19. Therefore, investors may want to seek opportunities elsewhere.

ChartData by YCharts

Fund Analysis

Portfolio construction based on past data

FDVV’s portfolio is constructed by the following three criteria: dividend yield, payout ratio, and dividend growth based on past 12-month information. The first criterion receives a 70% weighting in the composite score. The remaining 30% of the composite score is equally split between the last two criteria. The selection criteria have resulted in a portfolio of attractive dividend-yielding (trailing 12-month dividend yield of 4.8%). In addition, many of its top holdings have consistently increased their dividends in the past (see chart below).

ChartData by YCharts

Cyclical sectors in FDVV’s portfolio may not perform well due to COVID-19

Despite the fact that some of the stocks in FDVV’s portfolio have increased their dividends consistently, investors should keep in mind that past dividend growth does not guarantee future dividend increases. In fact, its high exposure to cyclical sectors may result in future dividend cuts for some stocks in its portfolio. While FDVV does not overweight on a single sector, cyclical sectors still represent a large chunk of its total portfolio. As can be seen from the table below, financials, materials, real estate, energy, industrials, and consumer discretionary sectors represent over 57.55% of its total portfolio. These sectors are vulnerable in an economic recession. The recession caused by the outbreak of COVID-19 has the potential to last for an extensive period of time unless a vaccine can be quickly developed. However, it is unlikely that a vaccine can be developed quickly. In fact, many epidemiologists think that it may take 12 to 18 months for a vaccine to be developed. Even if a vaccine is developed, it is uncertain about the efficacy of the vaccine. Therefore, it is likely that many cyclical stocks in FDVV’s portfolio will continue to struggle in the next 1-2 years as many people practice social distancing. In this environment, some stocks may be forced to cut their dividends in order to preserve cash. Therefore, FDVV’s performance will likely be negatively impacted.

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Source: Fidelity Website

FDVV is trading at a premium already

Below is a table that shows FDVV’s top 10 holdings. While some stocks in FDVV’s top 10 holdings are trading at forward P/E ratios below their 5-year P/E ratios, there are many stocks that are trading at valuations way above their 5-year averages. In fact, its weighted average forward P/E ratio of 19.58x of its top 10 holdings is higher than its 5-year average of 18.56x. Therefore, we do not think FDVV is cheap right now.

Ticker

Company Name

Forward P/E

5-Year P/E

Weighting

MSFT

Microsoft

29.15

22.63

5.10%

AAPL

Apple

24.06

16.27

4.69%

PG

Procter & Gamble

21.88

21.18

3.24%

PEP

PepsiCo

23.98

20.97

2.90%

CVX

Chevron

N/A

24.14

2.71%

XOM

Exxon Mobil

N/A

20.96

2.42%

PM

Philip Morris International

13.61

18.05

2.24%

WMB

Williams Companies

18.32

25.49

2.23%

JPM

JPMorgan Chase

13.48

11.64

2.20%

OTCPK:MRWSF

Wm Morrison Supermarkets PLC

14.20

16.82

2.17%

TOTAL/WEIGHTED AVERAGE

19.58

18.56

24.80%

Source: Created by author

Investor Takeaway

FDVV is an interesting choice for investors seeking yield. However, as we have discussed in our article, its backward-looking approach to construct its portfolio and its high exposure to cyclical sectors make it a less attractive choice, especially because uncertainty is very high due to the outbreak of COVID-19. Therefore, we think investors may want to seek opportunities elsewhere.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

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