CGDV Fund: Misleading Name, Exceptional Performance

Jack Bowman joins 'ETF Spotlight' to dive into Capital Group Dividend Value ETF (CGDV), the "misleadingly labeled" ETF that might be a trap for traditional value investors. He breaks down the structural shifts challenging everything about the divergence between growth and value.Follow Jack Bowman on Seeking Alpha!Follow CGDV on Seeking Alpha!This video's transcript was generated by a third party. It is not curated or reviewed and is provided for convenience and information purposes only. The accuracy and completeness of the transcript are not guaranteed.Past performance is no guarantee of future results. Content is offered for information purposes only. Unless stated otherwise, any and all individuals participating in the video are third parties that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body. Unless stated otherwise, the views or opinions expressed may not reflect those of Seeking Alpha as a whole.The accuracy and completeness of content shared cannot be guaranteed. Seeking Alpha does not take account of your objectives or financial situation and does not offer any personalized investment advice. Seeking Alpha is not a licensed securities dealer, broker, US investment adviser, or investment bank.Daniel Snyder: Welcome back everyone to another episode of ETF Spotlight. Today, we are joined by fan favorite, Jack Bowman, who is joining us once again. Today, we are diving into a specific ETF called the CGDV, and that is the Capital Group Dividend Value ETF. Now, this one's interesting, and I'm going to let Jack take a little bit of time here to explain it because it's called a Value ETF, but it may not actually be fully value. So, Jack, welcome to the conversation. Why don't you go ahead and kick things off here, give us the rundown on this ETF, why you decided to write about it, and also why you gave it a Strong Buy rating?Jack Bowman: Yeah. Thanks for having me. So, CGDV is, I think, the most misleadingly labeled ETF on the market. It's got a very simple, straightforward mandate, which is produce a dividend higher than the S&P 500 and do so by owning companies that either produce a dividend or have the potential to produce a dividend. And this is very different from most value ETFs, which focus on metrics like price-to-sales and price-to-book values, where they're trying to find cheap companies from a valuation standpoint, value companies.CGDV is not like this. They're looking at, if we can beat the dividend of the S&P, which is pretty low, right? The S&P 500’s dividend is like 1.3%, so it's not too terribly difficult to beat. And otherwise, just own companies we think will do well. How does that work? And so far, they've kept up with the NASDAQ's returns since their inception about three years ago, which is very impressive for Value ETFs.It has blown away Value ETFs in performance, but a lot of this has to do with their inclusion of what we would consider traditional growth names. Like, I mean, how many Value ETFs own NVIDIA, right? And that changes the dynamic of NVIDIA does pay a dividend. It's a very small dividend, but they account for inclusion. And when you change this, they call it value refined over at Capital Group. When you change this dynamic, it changes what you could consider value. And I think it's closer, we could say, to, like, a Quality ETF than a Value ETF.DS: So, I mean, this is interesting to me. So, it's value, but growth. Right? So, you're focused on what here? Capital appreciation and income? I mean, are we talking total return when you talk about comparing it to the NASDAQ, like, on a total return basis, it's outperforming?JB: Yeah. So, it's kept up on a total return basis when you factor dividends back in. And this is important to note because that higher dividend rate than the S&P, I mean, it is higher. Their dividend rate's 1.8% or something close to that, and that is a big component of total returns. The other thing that makes CGDV interesting is that their mandate doesn't dictate just U.S. large cap stocks. So, they're about 20% mid-caps in terms of weights, and then I think it's about less than 10%, but close to that 8% to 10% foreign stocks. So, non-US listed, mostly European and then developed Pacific like Taiwan or Japan, and South Korea.DS: Yeah. But when you look at the Top 10 holdings here, it's Eli Lilly, Microsoft, Broadcom, NVIDIA, RTX, GE Aerospace, Applied Materials, Starbucks, Meta, British American Tobacco. I mean, it doesn't sound like a lot of foreign.JB: Right. Well, and that's the – it's Sorry, let me think about it. Yeah. I think the impetus to diversify here is very small. And I think that's true for a lot of investors. I think if you just ask like the average investor, what capital markets do you want to be in? The majority would say, majorly U.S. Right? I want to be mostly in the U.S. companies and by market weight. I mean, Europe's largest company is barely a mega cap, right?ASML is their largest by valuation and it's less than a trillion dollars. I think it's like $250 billion. So, in this interplay of weighting companies, it's not a market weight index, but it's close to it. The larger companies tend to have larger allocations, the smaller companies tend to have smaller allocations, and so foreign stocks just on their own don't warrant a ton of investment weight-wise if you're going by market weights.Now, CGDV gets to change this. I think they're actually a little bit overweight, if we were looking at the world stock market. I mean, the world stock market's like 65% U.S. stocks, which is crazy to think about. And within that, I think one of the benefits of CGDV over an index like the S&P 500 is that they get to play around with that. Right? They get to overweight some of these foreign companies, even if naturally they wouldn't make the index, or they get to overweight mid-caps. Right?I mean, the S&P has no mid-cap exposure, and most value indices only focus on large caps. But like you said, it's – the top 10 is a list of the biggest, most valuable companies in America, and that's probably going to be true for most indices that have kept up with the market since those are the stocks that are the market. When you look at the S&P, about 50% of the S&P is split between 10 companies, and then the other 50% goes to the other 490.DS: Right. Yeah. I think everybody looks to the U.S. as a gold standard. Right? But I want to go back to, I mean, this ETF, as you're talking about, its objective is to beat the yield of the S&P 500, which I see here on Seeking Alpha Symbol page is currently reading at 1.28% yield, for the trailing 12-months. But, I mean, assets under management, almost 25.7 billion. So, obviously, people have taken a lot of notice to what this ETF is doing.So, thinking about forward from here, it's like, if I'm a value investor, I'm trying to get a sizable yield. So, maybe this isn't for me, but then also there's growth names in it. And as you said, it's called value refined. So, what type of investor is this fund actually for?JB: I think the investor who's looking at this and finding attractive is someone who's interested in total returns above dividends. If you're interested in dividends, there are dividend ETFs and high income ETFs that are probably way better suited for you. Right? We've covered the covered call ETFs on here before, SPYI and GPIX. Otherwise, I think people who are interested in receiving part of their return in dividends and want a higher yield, but don't need something crazy, don't need above 2%. Right?It's like so long as they beat the S&P’s yield, they fulfill their mandate, which means that beating them by 0.1% or as little as possible is still beating. And if you're someone who needs that guaranteed income stream, this is definitely not a product you might be interested in, but if you're willing to sell some shares when you need to shore up cash or take the income, then that could totally work for you, as, like, a total return investor.I think the other thing to note here is that I position in my writing that I see CGDV as a way to diversify a core holding. So, if you already just own the market as your equity exposure, this is a way to peel off from that and get similar exposure that's a little more diversified. It has a little more, not a lot, but a little more foreign exposure. It has some mid-cap exposure. It does lean towards value, though I think Morningstar considers it on the edge of value versus blended. So, it's almost an old school value fund.And when you look at the metrics, I think its average price to earnings is about 20 versus the market's 22. So, there is a little bit of value. But you're right that I don't think anyone who's a traditional, like, Ben Graham style, value investor is going to look at this and say, that's not a value fund. That's not even close to a value fund. And that's why I call this the most misleadingly labeled ETF is that if you just looked at the title and assumed from there, you'd miss the whole point of the fund.DS: Yeah. Now see, this is what this show is actually about. Because ETFs call themselves all sorts of things, but the investors behind the screen need to know what the actual strategy is. Because there's people out there that we know in our audience that are like, well, I want income, but I need it done in this specific way because of the tax structure I get hit with. So, it's just the enlightenment of knowledge.Now, I did want to follow-up and ask you, this fund is more on the newer side of things. Right? Launched February 21, 2022, obviously, that was the year of the bear market post-COVID. I haven't seen a ton. I mean, obviously, there was the volatility back in April with the tariffs and it does have the pullback on the chart there, but it's been just up into the right ever since the bottom of that bear market.So, going forward, should investors of this fund have to worry about those market shocks? Or do you think that this fund is one of those nice core holdings where you can just sleep at night, it's stable, you'll know it bounced back because of the type of companies that are inside of it?JB: It's a great question. It's not hedged in any sense. So, we shouldn't expect any better downside than the market. Though back in April, when we did see that shock, it fell less than the market. Though that might be idiosyncratic risk there at play. Right? It's like, CGDV only owns 50 or so stocks. So, the stocks that it does own have an outsized impact on its performance. Recently, we saw that during the November market correction, it had a very different trajectory than the market for a couple of weeks there, mostly because of its allocation to Meta. That it is overweight Meta, and when Meta has a big earnings call that changes its position, it can change the whole ETF very quickly. So, that's something people should consider there too of like, what are you actually invested in, right? Its largest holding is Eli Lilly, and any announcement about GLP-1s could really affect Eli Lilly, which then could affect the CGDV ETF very heavily since that's its top holding.And that's the same fear I have about the S&P with NVIDIA, right? When Nvidia is 7% of the index, then their earnings really matter to the entire index. And so the same with this fund, and I think it's also very heavily weighted onto NVIDIA as well. So, it has those same issues.DS: Let me ask you this, to put you on the spot. If you had to choose this fund or something like the popular SCHD, which one do you choose?JB: So for me personally, because I'm not in a situation where I need tons of income from my investments, I'm definitely not taking Schwab or SCHD. I'm not a huge fan of that fund in particular, and I know that's going to get me some ire. But I'm not a huge fan of the fund mostly because I don't think that we're entering a period where value is going to catch back up to growth. The divergence between value and growth has seemingly to me centered entirely around profit margins and the ability to expand profit margins.And we've learned that growth companies, software in particular, and now many of these hyperscalers, are able to grow profit margins like nobody's business. But old value companies are not this way, and that's part of why they've fallen behind is, I don't think it's some sort of like large market exuberance that has just bought up growth companies and said, old boring businesses can go by the wayside. But they're looking at it saying, well, these are old boring businesses and they should be valued as they are, and we're rerating and repricing growth higher as we realize how profitable it actually is and can become. Right?NVIDIA's profit margins are close to 70% because they don't manufacture their own chips. They just design them and sell the designs. That changes the dynamic between growth and value, and I don't see that reverting anytime soon. So, I would prefer to hold the growth oriented value portfolio as paradoxical as that may sound, over the pure value portfolio.DS: Yeah. Thanks for that. So, it sounds like you're talking about, like, almost like a K-shaped stock market because they say K-shaped economy, but when you're talking about something like that, it definitely makes more sense in that regard of imagery. Right? One last question before we jump off here for you, Jack. You just put out your article about your year-end price target for next year, 2026. You have it listed 7,833 on the S&P 500 Index or 782 in SPY. Can't help but wonder, 7833 is such a specific number. Why are you so bullish?JB: So, I'm bullish for a lot of reasons. Structurally, I see cheaper borrowing and lower rates ahead of us. I see the government as having no choice, but to lower rates forward because they just can't pay that much on their debt. Right? Being at 4% or 5% interest rates for a long period of time will just bankrupt our government. So, they have to come down. That will increase the amount of borrowing these companies can do, borrowing that a lot of these big, heavy on CapEx hyperscalers want to do. So, it's going to make it easier for them to continue building out data centers, to continue building out their profit margins and expanding their multiples. So, I'm bullish on that structurally.I also don't see a reason for the market to correct in any meaningful way outside of idiosyncratic shocks, right? Like I don't foresee the structure of our bull market breaking down. And the reason I got to that very specific point, and of course, I'm almost never precise about these targets at the end of the year, it'll end up somewhere close to that. But I'm using geometry for this, a Fibonacci retracements and technical analysis of looking at where we were, where we are, and where we could go.So, if someone were to take, like, maybe not the specific number, although if I'm right on the specific number, I'll take a shot for that. Otherwise, I'm just looking at, what is the most likely scenario? And for me, that's about 14% to 15% above current levels for next year. If we continue the bull market and the patterns don't break and fundamentals can break patterns. Right? The pattern was not supposed to break in April this year, but it did because fundamentals got in the way. Right?An announcement aftermarket about tariffs can destroy any technical outlook that you had before. So, I always reserve the right to say, hey, if things change, my targets might change, but for now, unabated, I see the market continuing on a fairly linear path forward, and that's about 14% to 15% from here.DS: I sure hope you're right. Let's leave it there. Everybody, Jack Bowman, go follow him on Seeking Alpha. If you haven't read his most recent analysis already, go do so. He lays out a lot of great information there. I highly encourage you to check it out. We'll actually throw the link below this video for you, but go follow him there. Make sure you're always getting his updated analysis. He really does a lot of effort behind the scenes writing here on Seeking Alpha. And you've been doing it for a few years, Jack. You're one of my favorite new writers here that we've had in the last few years. So, always a pleasure to have you on the program. Everybody, thank you for watching this week's episode of ETF Spotlight, and we'll see you here again soon. Take care.Follow Jack Bowman on Seeking Alpha!Follow CGDV on Seeking Alpha!