Active ETF Strategies Aimed at Faster Dividend Growth vs. the S&P 500

That's where Brentview's actively managed approach, we think, can be a value add to get a little bit more growth in the portfolio. The goal of the overall portfolio management team is a faster dividend growth rate than the S&P, a higher dividend yield than the S&P, with a lower beta. I'm Britney Mason with ETF Guide, and it's great to have you with us. If you're new to ETFU TV, be sure to hit the subscribe button to join our community. Also, post your likes and comments in the section below this video. We enjoy interacting with our viewers.

Market volatility has been rising, and so has chaotic policymaking, along with trade wars. How can investors and advisors navigate the bumpy road? We're pleased to have with us Chandler Nichols, vice president of ETF product at Advisor Asset Management. Chandler, it's great to see you again. Great to be back. Now that we have a new administration in Washington, things have dramatically changed. The administration has been moving swiftly to enact new policies, and some of that has increased market volatility.

So, how should investors and advisors be thinking about their income portfolio allocations going forward? It's a great question. From our standpoint, we do think the potential for higher for longer is definitely there, given some of the recent policies that have come about as a result of the resulting trade wars that have definitely been on the rise over the past few months since the new administration has taken hold. We think there's opportunity regardless, and there's definitely a level of uncertainty in the market environment. So, there's actually a case for both sides of the fence in terms of the Federal Reserve holding interest rates tight and holding them higher for longer, but there's also a case for them to potentially cut interest rates as well should global growth in the United States end up slowing down as a result of the trade wars and as a result of the potential for higher inflation expectations and the potential of deregulation, though it could potentially keep interest rates higher for longer.

We think the overall solution for the higher for longer environment could potentially be to look at different types of credit assets, particularly on the short end of the interest rate curve, but also straying towards different types of alternative asset classes in the fixed income market. We think the securitized credit markets could be an interesting way for investors to potentially receive inflation-beating returns while being able to maintain elevated levels of income potential. On the flip side, if interest rates do continue to fall beyond the current rate that we're seeing right now, the federal funds rate is portraying, we think equity income could potentially be a nice opportunity for the current time period because as interest rates fall, bonds become less attractive from an income standpoint. Equity income might be the perfect mousetrap for investors as a way to naturally get income but also achieve a level of diversification because high dividend strategies tend to stray away from some of those high-growth, high-tech names that have been pretty volatile to start the year.

Why might investors and advisors want to consider preferred stocks in this environment, and how might the AAM low-duration preferred and income securities ETF PFLD be a potential solution? It's a great question, and PFLD is definitely our flagship fund here at AAM. Just to give a background on the strategy, which I think leads into the overall question regarding the portfolio use case for a strategy like PFLD, it's very simple. It's an index-based strategy, starting off with the broader exchange-traded US dollar-denominated preferred stock universe, and the strategy that's index is essentially enacting two different screens. The first screen, and the name definitely alludes to this given it's a low-duration strategy, is its duration screen.

PFLD and its index will essentially remove any preferred stock from its initial universe that has an option-adjusted duration above 5 years. Naturally, in an elevated interest rate environment, PFLD could potentially be a good mousetrap for an investor to still receive an elevated level of tax-efficient income that preferred stock investors enjoy, but at a lower duration level and potentially at a lower level of volatility. On the flip side, if interest rates fall, PFLD is definitely what we consider to be an evergreen strategy. The second screen that it implements personifies this. What this screen is is essentially a call risk screen. So, on top of that duration screen, eligible preferred stocks in PFLD will essentially be removed if they're trading at a 5% premium to their face value, thus limiting potential reinvestment risk within the end portfolio and limiting the amount of call risk potential by the issuers of such preferred stocks. So, regardless of the environment and how the interest rate landscape ends up panning out, we definitely think PFLD can be a nice way for investors to receive tax-efficient income at elevated levels relative to traditional corporate credit assets.

AAM launched a new actively managed fixed income ETF, the AAM SLC low-duration income ETF ticker LODI. What makes the strategy attractive in the current environment, and why go active for this segment of the market? Again, another great question. LODI is our newest launch and definitely personifies what AAM looks to do in terms of bringing different types of asset managers to market, asset managers that we've worked with in the past that have institutional-grade strategies. That's what LODI is doing. The subadvisor is an affiliate company of AAM, SLC fixed income. They manage over a hundred billion dollars in fixed income assets, and this strategy is already in existence in the SMA format, and we're really excited to bring it to the ETF wrapper and democratize access for investors.

The strategy is a bottoms-up, fundamental bond picker strategy managed by the experts at SLC, and a lot of the value added, most of the value adds going to come from that bond selection process because from a duration standpoint, the SLC low-duration income ETF LODI will essentially be duration neutral to its benchmark, which is the Bloomberg 1 to 3-year government credit index. So, expected duration anywhere from 1 to 2 years from what we've seen since the fund has launched. Again, could potentially be a nice mousetrap for investors to lower the duration of a core portfolio. But for investors that are seeking to deploy cash to work and are willing to take on the credit risk that comes with a portfolio like LODI and the slightly higher level of duration risk that comes with a portfolio like LODI, could definitely be a way to continue outpacing inflation through the elevated levels of income potential that LODI seeks to achieve through not just corporate credit, but securitized assets as well, which is definitely where a lot of the value added the portfolio could potentially be found.

One final question before you take off. When markets get rocky, dividend investors don't want any surprises. They want stability. AAM offers two dividend ETF solutions: the AAM S&P 500 high dividend value ETF ticker SPDV and the AAM Brentview dividend growth ETF ticker BDIV. Each fund offers a unique dividend approach. Could you tell us more? Yeah, 100%. I mean, I think definitely setting the stage for the differences between the types of strategies that SPDV and BDIV are implementing is basically the difference between a high dividend strategy and a dividend growth strategy. Dividends in the name, but they're actually very different in terms of what they're doing here.

SPDV is seeking your highest yielders in terms of what its portfolio is looking for, but BDIV is looking for your fastest dividend growers and your highest dividend growers, regardless of what their actual yields are. So, BDIV can be thought of more as a core strategy, a quality value factor type strategy that uses dividend growth as a way as a mechanism to achieve a nice, fundamentally sound portfolio. SPDV does something similar but concentrating on high dividend yielders. Just to break down each ETF really quickly, SPDV is looking, as I mentioned, high dividend yielders, but also looking for high free cash flow yielders within its portfolio of the high dividend and high free cash flow yielding companies from the S&P 500. The top scores from each GICS sector, the top five scores from each GICS sector, will be chosen. So, 55 stocks total. The portfolio will be equally weighted upon a rebalance. So, it can also be looked at as a deep value play and no magnificent seven exposure because of the concentration towards high dividend yielders, overweighting defensive sectors that have done pretty well year-to-date is something that we really like about SPDV in the current environment.

To pivot over to BDIV, it's a new launch that AAM came to market with at the end of July of 2024. Similar to LODI, again, it's bringing an institutional-grade strategy to the market, and no better experts than Brentview Investment Management, who has decades of experience in dividend growth investing. Just to summarize the overall value add that BDIV definitely brings relative to the other solutions in the market is that it really does take an unconstrained approach. In certain types of dividend growth indexes that are out there, they tend to be constrained because they're basically saying, "Hey, look, how many years has this stock grown its dividend over x amount of time frames?" Looking at 5 years or 20 years or 25 years, we believe to be a little bit subjective in terms of indexing this type of approach. That's where Brentview's actively managed approach, we think, can be a value add to get a little bit more growth in the portfolio, with that being a goal of the overall portfolio management team is faster dividend growth rate than the S&P, higher dividend yield than the S&P with a lower beta. So, two different schools of thought. Both definitely have their own interesting use cases, and we're definitely excited about these two strategies in the current market environment that's been pretty dominated by growth.

Thanks, Chandler, for dropping by and sharing your insights. Thanks for having me on. To learn more about ETF income strategies at Advisor Asset Management, be sure to visit aalive.com. The link is posted in the description below. And don't forget to hit the subscribe button and the comment section below. I am Britney Mason with ETF guide. Thanks for watching.