FTDS: Why First Trust's Dividend Strength ETF Is Not Worth Owning

The First Trust Dividend Strength ETF (FTDS), which selects stocks based on dividend strength, exhibits strong fundamentals but its high 0.70% expense ratio significantly reduces its expected dividend yield to 1.68%, making it less attractive compared to peers like the Vanguard Dividend Appreciation Index Fund ETF (VIG). While FTDS's top holdings meet dividend growth and payout ratio criteria, its sector allocation overweights Financials and Industrials, contributing to higher volatility and underwhelming factor scores, leading to a neutral "hold" rating.

Analysis

The First Trust Dividend Strength ETF (FTDS) employs an equal-weighted strategy selecting stocks based on dividend strength criteria such as low debt, high return on equity, strong dividend growth, and low payout ratios. Despite its selection methodology yielding fundamentally sound constituents, the ETF's appeal is significantly diminished by a high 0.70% expense ratio, which reduces its expected dividend yield to 1.68% from an index yield of 2.38%. This expected yield is lower than its trailing yield (2.12%) and notably trails peers like the Vanguard Dividend Appreciation Index Fund ETF (VIG), which offers an expected yield of 1.80% with a much lower 0.05% expense ratio. Since its strategy change on April 29, 2022, FTDS has returned 20.47%, outperforming the iShares Select Dividend ETF (DVY) at 18.08% but underperforming the iShares Russell 1000 Value ETF (IWD) at 26.64% and significantly lagging VIG's 33.74%. FTDS also exhibited the highest annualized standard deviation among peers at 18.37%, resulting in lower risk-adjusted returns (Sharpe and Sortino Ratios) compared to IWD and VIG. This higher volatility is linked to FTDS's substantial overweighting in Financials and Industrials, which comprise nearly 50% of the portfolio due to its screening criteria, and an underweighting in traditionally defensive sectors like Consumer Staples and Utilities. While FTDS's top 25 holdings generally meet its stated quality screens and the fund trades at a forward P/E of 14.26x, its sector-adjusted value factor score is a modest 3.18/10, suggesting its valuation appeal is not as strong as headline figures might indicate. The fund's high turnover, noted at 104% in its latest annual report, implies frequent rotation within its eligible universe, which, combined with its yield-driven selection, may lead to poor momentum characteristics.

Key Decisions for Investors

• Investors should critically evaluate the impact of FTDS's high 0.70% expense ratio, which substantially erodes its net dividend yield, making it less attractive than lower-cost alternatives for income generation.
• Consider allocating to more established, lower-cost dividend ETFs like VIG (0.05% expense ratio), which has demonstrated superior historical risk-adjusted returns and offers a comparable expected yield without FTDS's significant fee drag.
• Recognize that FTDS provides concentrated exposure to the Financials and Industrials sectors, contributing to its higher volatility; investors seeking such specific sector tilts should weigh this against broader market dividend strategies or consider more direct, potentially lower-cost sector ETFs.
• While FTDS's underlying stock selection process appears robust, the combination of high fees, elevated volatility, and underperformance relative to key peers warrants a cautious approach, aligning with a neutral 'hold' stance for existing investors but suggesting new capital might be better deployed elsewhere.