What is a Touchstone?
I have heard the term “touchstone” but I had no idea what a touchstone is. A quick internet search told me that a touchstone is a hard black stone, such as jasper or basalt. A touchstone was formerly used to test the quality of gold or silver by comparing the streak left on the stone by one of these metals with that of a standard alloy. A touchstone is any excellent quality or example used to test the excellence or genuineness of others.
There is a company called Touchstone Investments, that is a part of Western and Southern Financial Group. Touchstone just rolled out a new dividend-focused ETF with the ticker symbol DVND. The fund name is Touchstone Dividend Select ETF. The purpose of this post is to help the reader scratch the surface to understand the quality of the Touchstone solution. One of my readers sent me a couple of questions about this ETF, and he said I can share his questions.
Andy’s Two Questions
- I’m sure you have seen the article on DVND, the newly created ETF. It seems that most quality ETFs trade at $50 or higher. Do you see a fund like this doubling in the coming years simply based on its dividend strategy or is there too much competition from the already established ones such as SCHD, VYM and DGRO to where these “new” funds tend to not see much movement?
- Seemingly silly question: If a particular fund’s holdings perform well, this doesn’t necessarily mean that the price of the fund goes up or that owners of the fund directly benefit, correct? The fund’s price and the benefit to its owners is only rewarded when the market recognizes performance and drives the price up by buying.
As always, Andy is asking some very good questions. In essence, he wants to know if this new fund is going to be very successful and he wants to know what a fair price for DVND might be.
The Price of an ETF is Based on NAV
Most car buyers don’t want to pay more for a car or SUV than the vehicle is worth. Most vehicles have a value that is based on the condition of the vehicle, its age, mileage, features and sometimes based on rarity. But you shop around when you buy an expensive means of transportation. Wise investment buyers do the same thing. They want to know the NET ASSET VALUE.
According to Fidelity (link below), “A fund’s NAV is the sum of all its assets (the value of its holdings in cash, shares, bonds, financial derivatives, and other securities) less any liabilities, all divided by the number of shares outstanding. It’s basically an indication of the fair value of a single share of the fund. It provides investors a reference point around which they can gauge any offers to buy or sell shares of the fund.” The NAV changes every day. The Fidelity article covers more details, including how the NAV is calculated, the NAV’s shortcomings, and some technical information about intraday or indicative NAV’s.
It is possible to find the NAV of any ETF using various web sites. For example, MarketWatch gave the NAV for ETF VYM as $105.61 as of the August 5 market close. That means each share, which contains 400+ stocks is worth $105.61 as the sum of all of the assets in the fund. If someone paid $106 per share, they paid more than the NAV. If they paid $105, they paid less than the NAV. This really doesn’t matter much, as the prices for 400 different stocks can change dramatically on any given day and during any month of the year.
The Answer to Andy’s First Question
“Do you see a fund like this doubling in the coming years simply based on its dividend strategy or is there too much competition from the already established ones such as SCHD, VYM and DGRO to where these “new” funds tend to not see much movement?” Answer: the price of the fund is a function of the growth of the value of the fifty-two investments currently in DVND. So it really doesn’t matter if the price per share is $50 per share or $100 per share. What is more important is the prospective growth of the value of the shares of all of the companies in the fund in total. Rarely do I consider “price” as a valid means of choosing an investment. If DVND shares were selling for far less than the NAV of the combined assets, it might be attractive. But there are more serious problems with DVND that I will discuss in a moment.
The Answer to Andy’s Second Question
“Seemingly silly question: If a particular fund’s holdings perform well, this doesn’t necessarily mean that the price of the fund goes up or that owners of the fund directly benefit, correct? The fund’s price and the benefit to its owners is only rewarded when the market recognizes performance and drives the price up by buying.”
It is highly unlikely that many investors will be willing to pay a premium for DVND. There are several reasons for my opinion. First of all, DVND has an expense ratio of 0.95%. That is outrageous and is so much more than the expense ratio for passively managed ETFs with history to prove their success.
Secondly, the total assets in the ETF at this time is slightly more than $5 million dollars. Any fund with less than $500M in assets is something most investors should avoid. In addition, trading volume matters. Because there are so few investors currently trading DVND, it will be hard to sell any shares at a price that might make sense when you want to or need to sell. DVND had trading volume of about 5,000 shares when I looked earlier today. By way of comparison, VYM traded 1,609,585 shares today.
The Deal Killer
The real deal killer, however, is the lack of any true picture of the dividend yield or any dividend growth history for this fund. I looked at the 52 holdings in the fund and don’t see anything that makes DVND special. It contains a lot of “me too” stocks that are all large cap investments. Having said that, if all 52 investments shoot up more than the market, then the investors will be very happy and the DVND fund managers will look like rockstars. Don’t bet on it.
Touchstone Dividend Select ETF Fund Profile
Touchstone ETF Trust – Touchstone Dividend Select ETF is an exchange traded fund launched and managed by Touchstone Advisors Inc. It is co-managed by Fort Washington Investment Advisors, Inc. The fund invests in public equity markets of the United States. It invests in stocks of companies operating across diversified sectors. The fund invests in value stocks of large-cap companies, within the market capitalization range of the S&P 500 Index. It invests in dividend paying stocks of companies. Touchstone ETF Trust – Touchstone Dividend Select ETF is domiciled in the United States.
Full Disclosure
Will your investment advisor show you their actual investment returns on their own personal retirement investments? Most are not willing to do that. I want you to know that I am willing to share how well or how poorly my investment recommendations perform. Here is today’s snapshot of the one-year returns on my ROTH IRA. One of the reasons this has been a better year for me than for most of the market is my focus on dividend growth investments. Owning shares of an ETF like VYM certainly helps when the market is volatile. But my goal isn’t to beat the market. My goal is to grow dividends to stay ahead of inflation in retirement.
Cindie and I own shares of VYM, SCHD and DGRO. I am open to new ETFs that offer low costs and growing dividends. DVND does not measure up.
Know Your Flocks & Herds 