Fund in Focus: Horizons Active Canadian Dividend ETF

Quality metrics make it an attractive prospect

The Fundata FundGrade A+® Award-winning Horizons Active Canadian Dividend ETF (TSX:HAL) is a systematically managed fund that has delivered very strong absolute and risk-adjusted returns for investors since its launch in February 2010. Its 5-year average annual compounded rate of return to May 31was 6.4%, outpacing the S&P/TSX Composite, which returned 4.0% over the same period. For the past 12 months, it earned 8.4%, beating the 3.0% posted by the index.

Manager Sri Iyer and his Systematic Strategies team at Guardian Capital look for Canadian companies that have the ability to pay, sustain, and grow their dividends. The team uses a ruled-based screening process that analyzes 31 different factors, looking for positive rates of change. These factors focus on growth, payout ratios, efficiency, valuation, and investor sentiment.

The result is a well-diversified portfolio, holding around 60 names, with the top 10 making up just under 30% of the ETF. It invests in companies of any size, and has roughly 43% in big-cap names, with the balance in small- and mid-caps.

Top holdings as of May 31 included Enbridge Inc. (TSX: ENB), Pembina Pipeline Corp. (TSX: PPL), Royal Bank of Canada (TSX: RY), TC Energy Corp. (TSX: TRP), Toronto-Dominion Bank (TSX: TD).

The sector mix is dramatically different than the broader Canadian market, with an overweight in energy, financial services, industrial services, and utilities. It is underweight industrials, consumer cyclical and defensives, and technology.

Valuation levels look a bit rich compared with the broader market and the peer group. However, the stronger-quality metrics, combined with the higher forward-looking earnings growth rate, more than offsets the higher valuation, making it one of the more attractive options in the dividend ETF category.

It has also been one of the least volatile in the category, while delivering well above average returns. Looking at the defensive positioning of the portfolio, there is nothing to indicate a higher level of volatility ahead.

The biggest knock on this ETF is its cost, with an MER 0.79%, which is well above the category average. Still, the alpha generated has more than offset this higher cost.

This remains one of my top picks for Canadian dividend ETFs. The fundamentally-constructed Invesco Canadian Dividend ETF (TSX: PDC) is the other. I expect that with the focus on quality, both ETFs will hold up better than the broader market in the event of a selloff. Over the long-term, I continue to favour dividend stocks as a core holding for most investors.

Horizons Active Canadian Dividend ETF
Fund company: Horizons ETF Management
Fund type: ETF
Trading symbol: TSX: HAL
Fund category: Cdn Dividend & Income Equity
FundGrade Rating: A (May)
FundGrade A+ Award: 2018
Style: All-Cap Blend
Risk level: Medium
RRSP/RRIF suitability: Excellent
Managers: Sri Iyer and Fiona Wilson, Guardian Capital
MER: 0.79%

Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products.

Notes and Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.