KVLE: Defensive Q1 2023, Positive Outlook with Sector Shifts
Global equity markets saw robust performance in Q1 2023, as exemplified by the MSCI All-Country World Index being up 7.4%. U.S. and Japan performed better than the rest of the world, while Europe lagged due to banking issues. Growth stocks in technology, communication services, utilities, and consumer staples outperformed traditional cyclicals and defensives.
With a dividend yield of 2.93% (as of March 31, 2023), the KFA Value Line® Dynamic Core Equity Index ETF (Ticker: KVLE) offers a higher yield than the S&P 500 and the Russell 1000 Value Index, 1.70% and 2.38% respectively. Of more important note is KVLE’s superior performance compared to the MSCI High Dividend Yield NR Index since inception (November 24, 2020), 25.60% vs. 12.18%, respectively.
KVLE’s Index is rebalanced monthly to maintain a favorable risk profile compared to the S&P 500 from a market technical and volatility standpoint while providing a higher dividend yield. The three largest holdings of KVLE are Apple, Microsoft, and Google.
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Q1 2023 KVLE & Index Performance Update
KVLE is benchmarked to the 3D/L Value Line® Dynamic Core Equity Index, an investment index designed to prioritize stability and high dividend-paying companies.
For the quarter, KVLE returned 4.41%, falling short of the S&P 500's 7.50% return but surpassing MSCI High Dividend Index's -0.95% return. As dividend-focused strategies struggled to keep up with the surge in technology growth stocks that boosted the broader averages, KVLE’s defensive orientation dragged on its relative performance, especially in the earlier part of the quarter.
KVLE’s Index was underweight in Communication Services, Consumer Discretionary, Energy, Health Care, and Technology. Negative selection effects across Communication Services, Consumer Staples, Technology, and Consumer Discretionary, further hurt its performance against the S&P 500. The Index overweighting in Utilities, Financials, and Industrials partially offset these effects.
As of the end of March, the Index had lowered its defensive orientation toward market beta and sector/security positioning compared to the broader U.S. equity market. It remains overweight in Utilities, Financials, and Industrials while being underweight in Communication Services, Consumer Discretionary, Energy, Health Care, Technology, and Real Estate versus the S&P 500 Index.
KVLE underperformed compared to the S&P 500 in Q1 2023 due to its defensive orientation and adverse selection effects across various sectors. However, it outperformed other dividend yield-style indices as dividend-focused strategies struggled to keep up with the strong recovery in technology growth stocks.
Looking ahead, KVLE has reduced its defensive orientation and adjusted its sector/security positioning to overweight Utilities, Financials, and Industrials while underweighting Communication Services, Consumer Discretionary, Energy, Health Care, Technology, and Real Estate. We believe KVLE is positioning itself for better performance in the upcoming quarters, particularly if these sectors continue outperforming.
Dividend Yield - a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price.
S&P 500 Index - is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.
MSCI High Dividend Index - designed to reflect the performance of equities in the parent index (excluding REITs) with higher dividend income and quality characteristics than average dividend yields that are both sustainable and persistent.
MSCI ACWI Index - designed to represent performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 24 emerging markets.
3D/L Value Line® Dynamic Core Equity Index - seeks to capture quality US companies based on a three-factor process that selects stocks with high dividend yields and are the highest rated among Value Line®’s Safety™ and Timeliness™ Ranking Systems.