CGDV: A robust, low-risk ETF with the potential for market-beating returns (NYSEARCA:CGDV)

Capital Group Dividend Value Investment Fund (NYSEARCA:CGDV) appears to be one of the best options for those with low risk tolerance but seeking to outperform a technology-driven bull market. There are a number of reasons why it is a classic choice For high-risk adjusted returns, including its portfolio strategy of holding interests in primarily strong dividend paying large cap value and growth stocks from various sectors. CGDV’s smart portfolio management strategy allows its stocks to perform well in both bull and bear market conditions. Its total returns have outperformed the broader stock market index in the past 12 months, with momentum expected to extend in both the short and long term. Therefore, I am initiating coverage of the Capital Group Dividend Value ETF with a Buy rating.

Stock market forecast and CGDV

The US stock market expanded its range Last year’s rally continues into 2024, reaching record highs several times due to impressive gains from technology stocks along with positive contribution from the rest of the S&P 500 sectors. Strong earnings growth trends, improving business activity and deteriorating credit risk still appear to outweigh concerns about policy The Federal Reserve aims to keep interest rates at peak levels for a longer period. Finance section It also began to witness an increase in loan activity and a decrease in credit losses. Meanwhile, slowing inflation and the labor market point to economic stability and the potential for interest rate cuts in the second half of 2024. Currently, Wall Street’s forecast for 2024 is bottom-up Price target The S&P 500 index is about 5,900 points, which reflects an increase of more than 12% from the current level.

I also believe the uptrend is likely to extend because corporate earnings growth is expected to expand throughout 2024. In the first quarter, S&P 500 earnings grew 6% year over year, beating the consensus estimate of 3.4%. Analysts expect earnings to grow by 9.3% for the second quarter, 8.3% for the third quarter, 17.6% for the fourth quarter, and 11.4% for the full year. Furthermore, earnings growth rates are likely to strengthen in 2025, with a 14.2% year-on-year increase expected. Consumer cyclicals, technology and telecommunications stocks are likely to be the largest contributors. Therefore, it appears that large-cap technology stocks from these sectors are likely to lead the upside, a scenario in which defensive or low-beta stocks are likely to have difficulties catching upside. We’ve already seen this trend since the rally began in early 2023. Defensive-minded stocks and ETFs have significantly lagged the S&P 500 and the tech-heavy Nasdaq.

Taking into account current trends and expectations, investors with a low to moderate risk tolerance need to find ways to benefit from the upside without taking on too much risk. I believe investing in the Capital Group Dividend Value ETF can be one of the best ways to achieve higher risk adjusted returns. Its stock price rise of 31% outperformed the broader market index, while its 1.5% dividend yield helped push total returns to 34%. Last year, its profits rose 31% year over year.

How does CGDV deliver high risk-adjusted returns?

There are a number of factors that reduce the risk factor associated with investing in CGDV. For example, it is an actively managed ETF, which enables investors to benefit from the performance of various sectors and reduce the risk factor associated with a single stock. The second and most important factor is its portfolio management strategy. Investors also expressed confidence in ETFs as they were ranked among the most active ETFs last year. Its assets under management have swelled to $8.2 billion as of May 2023 from just over $2 billion at launch in 2022, while trading volume of 1.45 million shares is well above the average of 38.42 thousand shares. Furthermore, YCharts reported that it was also among the best-performing stock ETFs that focus on income based on performance and earnings.

Now let’s turn to its portfolio holdings to measure its ability to generate high risk-adjusted returns. The fund invests in large-cap, dividend-paying U.S. companies in value and growth categories across the S&P 500 sectors, with a primary focus on industrials, technology, healthcare and financials. The Fund uses a bottom-up fundamental analysis strategy to construct its portfolio. Its stake in well-established, high-performing technology stocks, such as Broadcom (AVGO), Meta Platforms (META), Microsoft (MSFT), Apple (AAPL) and others, puts it in a position to capitalize on the technology-driven uptrend. Meanwhile, its stake in industrial stocks, such as RTX Corp (RTX), General Electric (GE), Carrier Global (CARR) and General Dynamic (GD), improves the sustainability factor and reduces downside risks during volatility.

Although healthcare companies underperformed last year, they will likely return to positive earnings growth in 2024, which will boost their stock price and dividend performance. Its portfolio holdings in the healthcare sector include large capital with a diversified revenue base, significant cash flow and a strong history. Some of the major stocks in the healthcare sector are Amgen (AMGN), Abbott Laboratories (ABT), Abbvie (ABBV), and Gilead Sciences (GILD). Moreover, its stake in consumer staples and consumer defensive companies, such as Philip Morris (PM), reduces downside risks in a bear case while offering steadily increasing profits.

Quantitative assessment and evaluation

CGDV has a Buy rating with a Quantitative Score of 4. With its shares outperforming the broader market index, the ETF received a Negative A grade for Momentum. A higher momentum degree technically bodes well for further upside. This is because stocks or ETFs with high momentum are seen as an extension of gains. In addition to momentum, fundamental and financial factors are also supporting the stock price rise. The expense ratio of 0.33 is also better given the average of 0.49%. As I mentioned above that the ETF carries low risk due to its portfolio structure, technical data, such as low beta and standard deviation, also prove my position. It received a grade of A in risk factor based on quantitative rating. The A score on the Liquidity Factor is due to the strong increase in its assets under management and trading volume compared to the average of all ETFs.

The prospects for strong upside in its share and low downside volatility are also supported by valuations. Despite outperformance in the last twelve months, CGDV shares currently trade at around 17.80 times earnings compared to 21.80 times the S&P 500. Likewise, its price-to-book and cash flow ratios are lower than the broader market index. While technology and industrial stocks have higher valuations, the ETF’s share of financials, healthcare, consumer staples and consumer defensive stocks helps bring down overall valuations. Since the earnings growth outlook is strong for its portfolio, its valuations are likely to remain within their historical average even if the price continues its upward momentum.

Peer analysis

Its closest peers include Bridge Builder Large Cap Growth Fund Inst (BBGLX) and JPMorgan Large Cap Growth Fund Retirement (JLGMX). Although both companies have performed well over the past 12 months, the high risk factor associated with these returns makes them less attractive to investors with low to moderate risk tolerance. For example, technology stocks from the IT and consumer cyclical sectors represent 47% of the Bridge Builder Large Cap Growth Fund Inst (BBGLX) portfolio. In the case of JLGMX, the percentage stake in these high-beta sectors represents 63% of the total portfolio. Meanwhile, CGDV offers a greater balance between growth and value stocks. Moreover, rather than tracking any benchmark, its focus on holding positions in fundamentally strong large-cap, dividend-paying stocks from across sectors increases its ability to generate higher risk adjusted returns.

Risk factors to consider

There are a number of risk factors to monitor when investing in CGDV, including economic volatility. For example, if the Fed expands its strategy of keeping interest rates at peak levels throughout 2024, there will likely be a negative impact on economic growth and corporate performance. A higher-for-longer rate strategy can also increase pressure on the financial sector and deteriorate asset quality. Besides macro trends, some of its holdings in the technology sector are also exposed to valuation risk. Therefore, due diligence is required before making an investment decision.

In conclusion

It is not possible to completely mitigate the risk factor associated with any investment. In the case of Capital Group Dividend Value ETF, the risk factor is low when compared to its peers or growth ETFs. This is due to its smart portfolio management strategy of only investing in well-established companies with strong fundamental outlook. On the other hand, its portfolio also appears well-positioned to benefit from the current and potential upside due to exposure to growth and technology stocks. Therefore, CGDV appears to be a solid investment option for investors with low risk tolerance who seek to achieve market-beating returns while reducing the risk factor.