The 2 Best Market-Beating Dividend ETFs You’ve Never Heard Of

This article was published on Dividend Kings on Monday, Jan. 30, 2023.

The media obsesses over the S&P and sometimes the Nasdaq and Dow. So naturally, a lot of investors obsess over that as well.

The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” – Ben Graham

But remember that beating the market isn’t the goal for most people. Even getting rich shouldn’t be the goal.

Money is a tool that, without a good purpose, can lead to ruin and misery.

My family hedge fund has a very clear goal. Harness the power of the world’s 950 best companies to make our dreams come true.

What My Family Hedge Fund Is For

• paying my grandparents out of pocket medical bills
• helping my sisters send their kids to college
• helping me send my kids to college
• ensure my sisters have a comfortable retirement
• buy my parents a retirement home in Poland (where my family is from)
• buy my family our dream home in North Oaks (the best city to raise a family in Minnesota, the 3rd best state to raise a family in)
• donate millions (and eventually billions) to charity over time

Right now, family medical expenses are eating up the dividends, but eventually, thanks to the help of all 8 billion people on earth, who are the customers generating the sales and profits, and dividends of this portfolio, all my family’s hopes and dreams will come true.

It’s not a matter of if, just a question of when.

And this is why I’m always looking for ways to improve the family hedge fund.

What The Dividend Kings ZEUS Income Growth Portfolio Looked Like On December 5th

Stock	Yield	Growth	Total Return	Weighting	Weighted Yield	Weighted Growth	Weighted Return
QQQM	0.7%	11.9%	12.6%	16.67%	0.1%	2.0%	2.09%
SCHD	3.5%	7.6%	11.1%	16.67%	0.6%	1.3%	1.85%
EDV	4.1%	0%	4.1%	16.67%	0.7%	0.0%	0.68%
DBMF	9.5%	0%	9.5%	16.67%	1.6%	0.0%	1.58%
AMZN	0.0%	19.2%	19.2%	5.56%	0.0%	1.1%	1.07%
LOW	2.0%	20.6%	22.6%	5.56%	0.1%	1.1%	1.26%
MA	0.6%	23.2%	23.8%	5.56%	0.0%	1.3%	1.32%
BTI	6.5%	10.4%	17.4%	4.72%	0.3%	0.5%	0.82%
ENB	6.1%	5.1%	11.2%	4.72%	0.3%	0.2%	0.53%
MO	8.4%	5.0%	13.4%	4.72%	0.4%	0.2%	0.63%
HASI	4.7%	10.8%	15.50%	2.50%	0.1%	0.3%	0.39%
Total	4.2%	10.3%	14.5%	100.00%	4.2%	8.0%	12.2%

Click to enlarge

(Source: DK Research Terminal, FactSet)

4.2% yield and 12.2% historical and future consensus return potential.

• 10% to 14% annual income growth

When I first started designing my family’s ZEUS Income Growth portfolio, it yielded 4.0% and had 12% long-term returns.

Over time, I’ve added stocks and ETFs and tweaked the asset allocation (the stock, hedge, and blue-chip buckets) to improve the yield and returns.

And this weekend, in a marathon research session that was live on our chat board (including a managed futures Webinar hosted by DBMF CEO Andrew Beers), I explained why I was selling HASI, adding to NEP and BAM and adding two new ETFs to the portfolio.

What The Dividend Kings ZEUS Income Growth Portfolio Looks Like Today

Stock	Yield	Growth	Total Return	Weighting	Weighted Yield	Weighted Growth	Weighted Return
OMFL	1.7%	13.4%	15.1%	6.67%	0.1%	0.9%	1.0%
VIG	1.9%	10.0%	11.9%	6.67%	0.1%	0.7%	0.8%
SCHG	0.6%	12.8%	13.4%	6.67%	0.0%	0.9%	0.9%
SPGP	1.3%	15.2%	16.5%	6.67%	0.1%	1.0%	1.1%
SCHD	3.4%	8.6%	12.0%	6.67%	0.2%	0.6%	0.8%
EDV	4.1%	0%	4.1%	13.33%	0.5%	0.0%	0.5%
DBMF	9.0%	0%	9.0%	10.00%	0.9%	0.0%	0.9%
KMLM	9.4%	0.0%	9.4%	10.00%	0.9%	0.0%	0.9%
AMZN	0.0%	19.2%	19.2%	4.17%	0.0%	0.8%	0.8%
LOW	2.0%	20.6%	22.6%	4.17%	0.1%	0.9%	0.9%
MA	0.6%	23.2%	23.8%	4.17%	0.0%	1.0%	1.0%
ASML	0.8%	24.5%	25.3%	4.17%	0.0%	1.0%	1.1%
BTI	7.4%	10.4%	17.8%	3.33%	0.2%	0.3%	0.6%
ENB	6.3%	4.9%	11.2%	3.33%	0.2%	0.2%	0.4%
MO	8.3%	5.0%	13.3%	3.33%	0.3%	0.2%	0.4%
BAM	3.9%	14.6%	18.5%	3.33%	0.1%	0.5%	0.6%
NEP	4.4%	15.0%	19.4%	3.33%	0.1%	0.5%	0.6%
Total	4.0%	11.5%	15.5%	100.00%	4.1%	9.3%	13.4%

Click to enlarge

(Source: DK Research Terminal, FactSet)

The same yield as before, but 1.2% higher future return potential (and historical returns) and 11% to 15% income growth potential.

The key to improving a portfolio is knowing what fundamentals matter to you and whether adding a stock or ETF will enhance them.

• my family cares most about safe yield and long-term returns

Nothing gets added to my family hedge fund without a very good reason.

So why did we add the Invesco S&P 500 GARP ETF (SPGP) and Invesco Russell 1000 Dynamic Multifactor ETF (OMFL) to the portfolio?

Let me show you why I just bought some of these market-beating ETFs and you might want to do the same.

Invesco S&P 500 GARP ETF: Deep Value Quality Growth

SPGP is what I call the “Super GARP,” or growth at a reasonable price ETF. It combines value, quality, and growth in one of the most remarkable ETFs I’ve ever seen.

According to Morningstar, this is a 5-star ETF, which means that its historical returns are far superior to its peers.

For the last 10 years SPGP has been in the top 1% of its peers, generating almost 16% annual returns.

However, the current index it tracks changed on June 21, 2019, so only its three-year returns should be considered a potential indicator of its quality and investment strategy.

But over the last three years, its 14.2% returns have been in the top 2% of its peers.

While the benchmark might have changed, the historical ability to run circles around its benchmarks and rivals hasn’t.

Total Returns Since July 2019

SPGP, the Super GARP ETF, didn’t just beat the S&P. It destroyed it, and even beat the Nasdaq. During a red-hot tech rally that made the Nasdaq almost invincible to all challengers. Almost, but not this Super GARP ETF.

So what’s SPGP’s secret?

The Index comprises approximately 75 securities in the S&P 500 Index that have been identified as having the highest “growth scores” and “quality and value composite scores,” calculated under the index methodology. The Index constituents are weighted based on their growth scores. The Fund and the Index are rebalanced and reconstituted semi-annually.” – Invesco

SPGP doesn’t just screen for growth, like SCHG does, or quality like VIG and SCHD do, or value like value ETFs does. It screens for high-quality, deep value growth blue chips.

It takes three alpha factors and puts them into one relatively attractively-priced ETF. More importantly, Invesco has proven for a decade that the underlying strategy remains solid and well executed even when they occasionally change the index this tracks.

What does SPGP own today?

This looks nothing like the S&P or most ETFs. And that’s precisely the point. Note, however, that the 50% turnover ratio means this portfolio will, on average, look completely different two years from now.

This ETF is currently overweight healthcare and financials, though that could change in six months when it next rebalances.

• I’ll tell you the other downsides to this ETF in a moment.

Want growth at a reasonable price? How about 12.6X earnings for companies Morningstar estimates are growing at 19%?

• 9.6X cash-adjusted earnings
• PEG ratio of 0.5

The Downsides To This ETF

No ETF is perfect, and there are plenty of downsides to this one as well.

• high turnover = higher tax bills
• dividends are highly variable from year to year
• low yield (not the goal of this ETF)
• not a core ETF (where you know with relative certainty what you’ll own)

If you want rock-solid income growth every year, then VIG is the best ETF I’ve ever seen (not a single year of down dividends since 2007).

• VIG is the best aristocrat and future aristocrat ETF (a core ETF)

SPGP has highly variable income and even saw its income fall from 2013 to 2016.

• income growth since 2012: 12.9% SPGP vs. 9.8% VIG

But the goal of SPGP is super GARP, which means focusing on high-quality growth at dirt-cheap prices. No ETF will give you everything you want, though some come close (SCHD is the best combo of yield + growth + income stability I’ve seen in an ETF).

Invesco Russell 1000 Dynamic Multifactor ETF: 5 Factors When They Are Most Useful

Many investors know about factor investing, the time tested methods of achieving market-beating returns.

• value
• growth
• dividend growth
• momentum
• low volatility
• quality

Different factors will work best at different times in the economic cycle.

Invesco uses its own proprietary economic model to determine when we’re in the economic cycle’s recovery, expansion, slowdown, and contraction phase. Then it overweights the factors and applies them to the Russel 1000.

Does this sound like market timing? It’s macroeconomic timing of value factors, and ALMOST no one can do it well. Here’s the proof.

The Russell 1000 is what HSBC considers most of the world-beater blue-chips on earth. And you can buy all 1000 for 0.08% per year via Vanguard’s VONE.

How many can ETFs with higher expense ratios beat VONE? Almost none…except OMFL.

It appears Invesco’s economic model and the index that tracks it may have cracked the economic cycle factor timing code.

This ETF is historically in the top 1% of its peers, which means the top 11 ETFs out of 1,112.

Total Returns Since December 2017

Do you know how many ETFs have a better Sortino ratio than the Nasdaq over the last decade? When FANG+ ruled all and big tech was unstoppable? Almost none.

• Sortino = unit of total excess return (above Treasuries) divided by negative volatility (the only kind that people fear)

But OMFL does, keeping up with the unstoppable Nasdaq over the last five years while suffering a peak decline that’s 33% smaller.

OMFL outperformed the S&P and Russell 1000 by 4% per year, something that very few ETFs or investors were able to do.

OMFL: The Best Anti-Bubble ETF On Wall Street

How many ETFs have a PE of 10? A few, mostly emerging markets and some Japanese value funds.

• 8X cash-adjusted earnings = anti-bubble ETF
• priced for approximately -1% growth

The market is pricing this portfolio as if these companies are shrinking yet Mornigstar’s analysts expect they are actually growing at 13.4%.

• about 25% faster than the Nasdaq 100
• and priced at private equity valuations

Sound incredible? Almost too good to be true? Nasdaq beating growth with Japan value stock valuations! A PEG of 0.6!

Well, like all ETFs, there’s a catch.

The Downsides To This ETF

This is one of the highest turnovers of any ETF I’ve ever seen. Now in fairness to OMFL the economic cycle has been extremely accelerated by the pandemic.

Normally turnover won’t be this high, but when the economy is changing fast so will this ETF.

• That’s what you’re paying those 0.21 % extra expense ratios for

Underweight tech and overweight industrials (which hit a new all-time high in 2022) is the kind of passive/active strategy that you want from an ETF like this.

• the index is actively managed by a rules-based strategy
• the ETF passively tracks the index with minimal fees

But of course, any ETF with such high turnover isn’t going to offer a stable yield, or provide you with a stable group of companies.

• SCHD, VIG, and SCHG are examples of core ETFs
• you can guess with high accuracy what’s in them at all times

If you want high-yield that goes up every year, SCHD is your best friend.

If you want fast-growing aristocrats and future aristocrats, the bluest of blue chips, VIG is for you.

OMFL has slightly variable income. However, it’s done a remarkable job of tracking the Russell 1000’s dividend, even though the ETF seldom looks anything like the Russel.

• 5-year income growth rate: OMFL 19% vs. 7% Russell 1000 vs. 19% SCHD

Almost no ETF can come close to matching SCHD’s income growth over the last five years…but OMFL does.

OMFL might not have the yield of SCHD or the clock-work-like dividend growth dependability of VIG, but it’s a proven market beater with amazing long-term dividend growth and a lot less variability than most growth ETFs.

During a time when SCHD was one of the few dividend ETFs to beat the S&P, OMFL beat SCHD.

Bottom Line: Specialty ETFs Like SPGP And OMFL can supercharge your portfolio

SPGP and OMFL are not perfect ETFs for everyone. But they make incredible additions to a diversified portfolio like my family hedge fund.

• SCHD: the world’s best high-yield blue-chips
• VIG: the best fast-growing aristocrats and future aristocrats
• SCHG: the 50% fastest growing S&P companies
• SPGP: Deep Value Quality Growth = Super GARP
• OMFL: the best anti-bubble blue-chip/factor + economic timing ETF I’ve ever seen

Combined with your favorite ETFs and blue-chip stocks, these ETFs have the potential to supercharge your returns and change your life.

My family trusts them with our financial dreams and that’s why I added them to the DK ZEUS Income Growth portfolio.

Because when you can get 4.1% safe yield, 13% to 14% long-term returns, 11% to 15% income growth, and volatility like this?

Bear Market	ZEUS Income Growth	60/40	S&P	Nasdaq
2022 Stagflation	-11%	-21%	-28%	-35%
Pandemic Crash	-9%	-13%	-34%	-13%
2018	-10%	-9%	-21%	-17%
2011	4%	-16%	-22%	-11%
Great Recession	-20%	-44%	-58%	-59%
Average	-9%	-21%	-33%	-27%
Average Decline vs. Benchmark	NA	45%	28%	34%
Median	-10%	-16%	-28%	-17%
Median Decline vs. Benchmark	NA	63%	36%	59%

Click to enlarge

(Source: Portfolio Visualizer Premium, Charlie Bilello)

Or how about recent returns like this.

Total Returns Since January 2021 (KMLM Inception)

Why pay a hedge fund 5% per year in average fees when it can achieve superior returns with far lower volatility and 2X the safe yield?

I have spent eight years researching how to build my family the ultimate all-weather sleep-well-at-night high-yield income growth portfolio and this is the result.

You can make this work by combining the world’s best blue-chip assets, including 5-star ETFs, the best hedging strategy of the last 42 years, and the world’s best individual blue chips.