This Dividend ETF Fell 6% in the 2022 Bear Market While the S&P 500 Dropped 19%

The ProShares S&P 500 Dividend Aristocrats ETF (NOBL 0.66%) fell 6.5% in 2022. (Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.) The Vanguard S&P 500 ETF, by comparison, fell 18.2% during the same calendar year. In the worst year for the S&P 500 since 2008, investing in long-term dividend growth stocks saved investors from roughly two-thirds of the index’s decline.

This isn’t surprising behavior for Dividend Aristocrats® — companies that have grown their annual dividend for at least 25 consecutive years. These tend to be more mature, defensive, cash flow-heavy businesses that, by their nature, are better built to withstand multiple market environments. Because they often offer products and services that consumers need regardless of whether or not the economy is in good shape, they can help mitigate downside risk in a portfolio.

NOBL: Quality without the megacap concentration risk

The fund’s equal-weighting strategy also helps limit risk. Absent here is the significant top-heavy concentration and tech allocation of the S&P 500. Five sectors — consumer staples, industrials, financials, materials, and healthcare — all receive allocations of at least 10%, while tech accounts for only a scant 3% of the portfolio. There’s very little potential for performance drag once the artificial intelligence (AI) allocation is exhausted.

To be fair, though, that downside protection does have a flip side. Over the past 10 years, the ProShares S&P 500 Dividend Aristocrats ETF has returned roughly 10% annually. That’s way behind the 15% average annual return of the Vanguard S&P 500 ETF. That’s to be expected in a strong bull market that’s heavily driven by just a handful of mega-cap stocks, especially tech stocks. The fund has a 10-year beta of 0.83. That means it’s likely to struggle to keep up with the broader market over the long term.

That makes the NOBL ETF a fund with a specific purpose for a specific group of investors. It works for people who want a smoother ride through the next market downturn and are willing to give up some upside potential in stronger markets to get it. That could describe retirees, income investors, or just people who have a lower risk tolerance. It’s a poor fit for anyone trying to beat the S&P 500 over a full market cycle.

The best way to think about this ETF is as a source of stability and downside risk mitigation, but not a core S&P 500 position. That’s something that can still be incredibly valuable.