We have qualitatively reviewed this strategy and reaffirmed its Above Average Process and Average People ratings. FlexShares Quality Dividend ETF remains a stellar option because it follows a savvy blueprint that ushers in profitable dividend stocks, muffles unrewarded risks, and charges a low fee. The following text is from March 16, 2023.

The Northern Trust Quality Dividend Index, which underpins this fund, aims to deliver three things: better yield than the broad market, exposure to the quality factor, and the same market sensitivity as a broad stock-market index. Pursuing yield can be a risky endeavor because the highest-yielding stocks often have weak fundamentals and sinking valuations. Focusing on quality helps the fund sidestep this risk while meeting its yield objective. 

Bending toward higher-quality stocks should boost fund performance and limit risk. The quality factor has historically been tied to market-beating returns. The fund measures quality on a sector-relative basis, considering stocks’ profitability, cash flow, and management efficiency – a complete evaluation that should highlight standouts in each sector.

The fund anchors its sector allocation to its parent index, the broad-market Northern Trust 1250 Index. This breeds a different sector composition than the unconstrained Russell 1000 Value Index, its category benchmark. Technology accounts for much more of this portfolio, while it underweights statistically cheaper sectors like energy and utilities. Matching the market’s sector allocation shields the fund from potentially unrewarded biases, but it can breed volatile index-relative performance when different sectors disperse. 

This portfolio diversifies well. Unlike some narrower value peers, it mines the full value-growth spectrum for opportunities. The top 10 holdings represented about one-third of the portfolio as of February 2023. That’s more than the Russell 1000 Value Index, but the fund’s quality focus means its top holdings – industry stalwarts like Apple AAPL, Microsoft MSFT, and Procter & Gamble PG – operate on solid footing. 

Juggling yield, quality, and beta objectives precipitates high turnover at each quarterly rebalance. Over the five years through 2022, the fund’s 75% median annual turnover ratio nearly doubled the category median. The transaction costs associated with turnover come directly out of total returns. That said, the annual turnover ratio has decreased for four consecutive years.

Analyst Rating

A balanced dividend fund.

Analyst

Ryan Jackson

Apple

Microsoft

Broadcom

NVIDIA

Procter & Gamble

Johnson & Johnson

Coca-Cola

AbbVie

Cisco Systems

We have qualitatively reviewed this strategy and reaffirmed its Above Average Process rating. The following text is from March 16, 2023. This fund has delivered the three items it pursues–strong yield, quality exposure, and measured market sensitivity–while keeping unrewarded sources of risk at bay. It earns an Above Average Process Pillar rating.

Above Average

Process

We have qualitatively reviewed this strategy and reaffirmed its Average People rating. The following text is from March 16, 2023. The FlexShares team that runs this fund lacks the resources of some competitors, but its experience and the risk management infrastructure that surrounds it should aid close index tracking. It earns a People Pillar Rating of Average. 

Rob Anstine, Brendan Sullivan, and Steven Santiccoli lead the effort here. Anstine has overseen the fund since October 2013 and has worked in the FlexShares equity index suite since 2011. FlexShares named Sullivan to the fund in June 2016; he arrived at the firm in 2012. Santiccoli started on this fund in March 2021 but has worked at Northern Trust since 1993. These are three of 12 total equity index managers on staff, each of whom can fill in for another at moment’s notice. This cultivates broad expertise that reduces key-person risk.

There are benefits to sitting within the wider Northern Trust organization, like a global trading desk. But the team lacks some resources, like index analysts focused on corporate actions and future rebalances. Adequate headcount and mostly automated workflow mean managers shouldn’t be overwhelmed, but they don’t have the same supporting staff as some larger ETF providers. 

An independent risk committee monitors team performance on an ongoing basis. It ensures the team is on track to meet its main objectives: reduce tracking error and capital gains distributions.

Average

People

Northern Trust Asset Management, or NTAM, has a solid plan for improvement, but it will take time to assess execution under new leadership. The firm maintains an Average Parent rating.

NTAM President Daniel Gamba took over in April 2023 and promised to double down on the asset manager's strengths. That means fortifying relationships with Northern Trust Wealth Managements' ultra-high-net-worth and institutional clientele, whom NTAM was built to serve. NTAM will aim to strengthen the money market and index funds those clients favor, then nurture the rest of the firm's lineup and potentially expand it.

Change has trickled through the investment organization as well. For instance, in his two-year tenure, CIO Angelo Manioudakis has seen significant leadership turnover in the fixed-income organization. He also converted the municipal-bond team from a generalist model to a specialized one. That was probably overdue but still requires personnel change and time to acclimate.

Despite the shakeups, NTAM does a lot right. The quantitative strategies team, formed under now equity CIO Mike Hunstad, is a deep unit that lends expertise to systematic and discretionary active offerings. The firm has shown discipline in developing new products and rarely closes existing ones. NTAM isn't a cost leader, but it prices funds competitively and recently cut fees on several mutual funds.

Parent

FlexShares Quality Dividend Index Fund

QDF tracks an index of companies deemed to have secure dividends that matches the beta of the Northern Trust 1250 Index.

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