ProShares S&P 500 Dividend Aristocrats ETF (NOBL) 2024 Review

You're likely familiar with the concept of Dividend Aristocrats—S&P 500 stocks that have not just paid but increased their dividends steadily for at least 25 consecutive years.

It's a pretty intuitive and popular strategy for dividend growth investors, and there's a fairly popular ETF for putting it in play - the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), a rare non-leveraged or inverse offering from a firm that usually caters more to traders

But is NOBL a good choice for a buy-and-hold investment? Let’s explore a thorough review of this popular dividend ETF to determine whether it's a worthy addition to your investment portfolio.

NOBL: What I like

While many investors might gravitate towards NOBL due to the impressive 25-year dividend growth streak of its constituents, I find the specific focus on dividends somewhat narrow. It's not that dividends are irrelevant—they are a significant part of total returns—but there’s more to the story.

What really stands out for me about NOBL is that its requirement for 25 years of consistent dividend growth acts as an excellent proxy for identifying top-quality companies.

The constituents of NOBL are companies that have demonstrated positive earnings and engage in conservative investing (CMA) while also showcasing robust profitability (RMW). These are key Fama-French factors that hint at underlying quality and stability.

From its inception in November 2013 until June 2024, NOBL has shown statistically significant loadings to both the RMW and CMA factors. This isn't just a dividend growth ETF; it's effectively a quality factor fund masquerading under the guise of dividend growth.

The ETF itself is straightforward. The process involves isolating S&P 500 companies that have consistently increased dividends for at least 25 years and then equal weighting them. There's no surprises for this ETF – you'll always know exactly why a company gets added or dropped.

This strategy yields a portfolio dominated by high-quality companies, typically overweight in sectors like consumer staples—with stalwarts like Coca-Cola and Procter & Gamble—and industrials, such as Emerson Electric and Illinois Tool Works.

NOBL: What I dislike

Unfortunately, my appreciation for NOBL largely ends with its factor exposures. Cost-wise, the ETF is excessively expensive for what it does. As one Reddit commentator succinctly put it:

Indeed, an expense ratio of 0.35% might have been competitive two decades ago, but in today's market, where Vanguard and iShares offer competing dividend growth strategies at just 0.06% and 0.08% respectively, a fee of 0.35% is tough to justify.

Additionally, NOBL exhibits higher turnover than many of its peers—about 21% of its current 67 companies change in a given year, compared to just 2% for something like the S&P 500.

This turnover, combined with the higher expense ratio, has contributed to NOBL lagging behind the SPDR S&P 500 ETF (SPY) in terms of both total annualized and risk-adjusted returns since its inception.

Another point is the paradox that some companies actually perform better once they are removed from the S&P 500 dividend aristocrats, either due to a dividend cut or failure to raise the dividend.

While a dividend cut typically signals trouble, this is not always the case. Consider the recent example of 3M, which cut its dividend significantly this year to 40% of their free cash flow, in order to fund lawsuit costs related to PFAS. Surprise, its stock is up 38% YTD as of August 19.

Furthermore, some companies may technically manage their dividends just enough to remain in the index, e.g., by raising dividends by just one cent per year for 25 years.

Sure, this technically meets the criteria of a dividend aristocrat but does not necessarily reflect robust dividend growth or financial health. Such manipulation can skew the perception of what it truly means to be a resilient dividend grower.

Finally, I'm not a fan of the equal-weighted process – I've always found it arbitrary and devoid of economic reason. In my opinion, fundamental indexing via yield-weighting or even market-cap weighting works better for dividend strategies.

NOBL: My verdict

Overall, I'd rate NOBL a 7/10. If you view it as a moderately priced quality factor fund with above-average dividends and a focus on mid-large cap U.S. blue-chip stocks, it can be suitable.

However, I wouldn't recommend it as a core portfolio holding. The 0.35% expense ratio is just too steep for what it provides, and the current portfolio of 67 companies feels somewhat limited.

Dividend income investors might also find NOBL less appealing due to its relatively modest 2.09% trailing 12-month yield and quarterly distribution frequency, which may not meet the needs of those seeking more frequent income.

While NOBL isn't a bad option for those looking for a quality tilt with a simple, time-tested, and transparent methodology, it can be effectively complemented by combining it with a small-cap ETF and a value ETF to diversify exposure and enhance potential returns.

That said, there are other dividend-focused ETFs out there with more robust factor exposures, diversified portfolios, and comprehensive index methodologies at a lower cost. For instance, consider reading my prior review(s) of the Schwab US Dividend Equity ETF (SCHD) and the WisdomTree U.S. Quality Dividend Growth Fund (DGRW), which can be found here.