DLN ETF: A Diversified Large-Cap ETF Generating Strong Returns Over The Long Run

~ by Snehasish Chaudhuri, MBA (Finance).

WisdomTree LargeCap Dividend ETF (NYSEARCA:DLN) is an exchange-traded fund (“ETF”) that benchmarks its performance against WisdomTree U.S. LargeCap Dividend Index. The index is a fundamentally weighted index that comprises dividend paying large-cap U.S. common stocks with growth characteristics. DLN comprises almost 300 equity stocks that are selected through represented sampling techniques. This fund was launched by WisdomTree Investments, Inc. and is co-managed by Mellon Investments Corporation and WisdomTree Asset Management, Inc. DLN generates low yield, but its total return is strong in the long run. The fund is currently trading at $63.08, almost at par with its NAV.

Composition and Returns of WisdomTree LargeCap Dividend ETF’s Portfolio

WisdomTree LargeCap Dividend ETF has a high asset base of $3.84 billion, and has a relatively low expense ratio of 0.28 percent. Almost 59 percent of its assets are invested in equities from four sectors – financial, healthcare, industrial, and information & communication technology (“ICT”). I expect these four sectors to generate higher-than-average growth in the coming decade. Equities from the remaining sectors, though generating relatively low-price growth, are much more stable in terms of their returns. Historically, the fund has been quite stable in terms of returns. Between 2016 and 2021, average annual total return stood at around 11.2 percent. During the past 10 years, total return stood at 11.6 percent.

WisdomTree, Inc. (WT) is a New York-based asset manager that manages approximately $86.6 billion (as of January 24, 2023) in assets under management (“AUM”) globally and invests in various ETF based products. The company also has branches in London, Dublin and Milan, and local marketing presence in Mexico and Israel. Two-third of its AUM are invested in the U.S., while the remaining is invested in Europe. In its website, the company claims to have “pioneered fundamentally weighted exchange-traded funds in 2006 that equally prioritized cost efficiency and performance.” In a simpler term, WT employs weighted investment methodology with the help of index-based funds. Unlike many other large-cap asset managers that put more emphasis on market capitalization, WT weights securities on the basis of factors such as dividends or earnings. WisdomTree at present offers 79 different investment products that are transparently managed on a daily basis by over 200 employees worldwide.

Major Holdings of DLN’s Portfolio Performed Quite Well During the Long Run

WisdomTree LargeCap Dividend ETF’s major investments are in four sectors. They include Apple Inc. (AAPL), Microsoft Corporation (MSFT), AbbVie Inc. (ABBV), JPMorgan Chase & Co. (JPM), Pfizer Inc. (PFE), Merck & Co., Inc. (MRK), Johnson & Johnson (JNJ), Cisco Systems, Inc. (CSCO), UnitedHealth Group Incorporated (UNH), AT&T Inc. (T), Broadcom Inc. (AVGO), Bank of America Corporation (BAC), United Parcel Service, Inc. (UPS), Bristol-Myers Squibb Company (BMY), Amgen Inc (AMGN), Morgan Stanley (MS), Abbott Laboratories (ABT) and International Business Machines Corporation (IBM). Out of these 18 stocks, barring AVGO, T and IBM, all other stocks have been first incorporated in DLN’s portfolio more than five years’ back.

All these 16 stocks have generated positive price growth during the past 5 years. DLN registered a price growth of almost 30 percent during the same period. Over the past 10 years, the price of these 16 stocks grew by at least 110 percent, i.e., at a compounded annual growth rate (“CAGR”) of 7.5 percent. During the same period, DLN grew by 146 percent, i.e., at a CAGR of almost 9.5 percent. Thus, we can understand why WisdomTree LargeCap Dividend ETF has been able to register a strong enough total return over the long run?

DLN’s Portfolio is Also in a Strong Position to Sustain its Pay-out and Yield

Significant investments in other sectors included Chevron Corporation (CVX), Exxon Mobil Corporation (XOM), Coca-Cola Company (KO), Walmart Inc. (WMT), PepsiCo, Inc. (PEP), McDonald’s Corporation (MCD), The Procter & Gamble Company (PG), The Home Depot, Inc. (HD), Philip Morris International Inc. (PM), and Altria Group, Inc. (MO). XOM and CVX were incorporated in the portfolio only a year back, after witnessing the boom in energy prices due to shortage in supply. Although all these stocks generated positive price growth during the past 10 years, only few of them (HD, MCD, PEP, and PG) were able to register a growth in excess of 7.5 percent CAGR. Also, these were the stocks that registered a growth in excess of 40 percent over the past 5 years.

However, these stocks pay quite steady dividends, which has enabled WisdomTree LargeCap Dividend ETF to generate stable payout. The fund was formed in 2006 and has been paying monthly dividends since 2012. Although its historical yield was quite low, they were quite consistent ranging between 2.27 and 2.87 percent for the past 10 years. The fund has maintained its consistency in the last twelve months too, with a TTM yield of 2.48 percent.

Investment Thesis

WisdomTree LargeCap Dividend ETF has a high asset base of $3.84 billion, and has a relatively low expense ratio of 0.28 percent. The fund is currently trading at $63.08, almost at par with its NAV. In my opinion, DLN is a less risky fund, and has a strongly diversified portfolio. It offers investors an attractive option to invest in dividend paying large-cap equities in diversified sectors in the US stock market. The fund pays a monthly dividend, generating stable pay-out. Although its historical yield was quite low, they were quite consistent ranging between 2.27 and 2.87 percent for the past 10 years. This yield is most likely sustainable over the long term. However, this yield is not lucrative enough to attract long term investors. Thus, the total return and its sustainability is of prime importance primarily for growth-seeking investors.

Almost three-fifth of WisdomTree LargeCap Dividend ETF’s assets are invested in equities from four sectors – financial. healthcare, industrial, and ICT – four sectors that are expected to generate higher-than average growth in the coming decade. Most of DLN’s investments in these sectors are part of its portfolio for more than five years. During this period these stocks generated positive price growth and DLN registered a price growth of almost 30 percent. Equities from the remaining sector, though generating relatively low-price growth, are much more stable in terms of their returns. Historically, the WisdomTree LargeCap Dividend ETF has been quite stable in terms of returns and generated close to double-digit total returns.

WisdomTree LargeCap Dividend ETF’s annual average total return over the past 3 years, 5 years, 10 years and 16 years has been 8 percent, 9 percent, 11.6 percent and 8.5 percent, respectively. Thus, this fund is a good bet for long-term investors.