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Despite Broad Earnings Downgrades, Deep Value Stocks Are Holding Relatively Steady

  • Last week, the ALPS Sector Dividend Dogs ETF (SDOG), a deep value portfolio of high-yielding large-cap stocks, slightly outperformed the S&P 500 Index (SPX Index) on a volatile week for equities that saw the US 10-Year Treasury yield jump above 3.7% on persistent inflation fears with equity strategists at major banks downgrading the 2022/23 outlook for US corporate earnings.

  • SDOG’s defensive sectors led fund performance last week amidst the risk-off sentiment. Packaged food producer and Consumer Staples name, Conagra Brands Inc. (CAG, 2.19% weight*), gained 1.54% last week on the back of General Mills (not in SDOG) announcing a stronger-than expected quarterly gross margin, implying resilient gross margins for food producers as pricing power keeps pace with inflation. Altria Group Inc. (MO, 2.01% weight*), another SDOG Consumer Staples name, outperformed last week as the tobacco company tends to offer a more defensive position for investors, given its consistently superior free-cash-flow yield relative to the S&P 500 index.

  • SDOG’s Healthcare sector also outperformed last week as biopharmaceutical giant, Bristol-Meyers Squibb (BMY, 2.21% weight*), reported strong sales growth in September for its Atrial Fibrillation (A-Fib) drug, Eliquis, and announced that its immunotherapy drug, Opdivo, to treat melanoma had met Phase 3 primary endpoints. AbbVie (ABBV, 2.22% weight*), another SDOG Healthcare name, also outperformed last week after the European Medicine Agency (EMA) provided a preliminary approval on the company’s Crohn’s disease treatment.

  • Propelled by increasing tensions between Russia and Ukraine last week, global defense company, Lockheed Martin Corp. (LMT, 2.15% weight*), traded flat last week within SDOG’s Industrial sector while announcing a $1.3 billion contract with the Bulgarian government to build F-16 fighter jets. SDOG Industrial name and military shipbuilder, Huntington Ingalls Industries, Inc. (HII, 2.15% weight*), also outperformed last week on the potential increase in defense contracting arising from the Russian military escalation.

* Weight in SDOG as of 09/23/2022

“High-profitability companies with moderate valuations have outperformed highly profitable stocks that have excessive valuations, a trend we view as likely to continue as the Fed's hiking cycle rolls on. Companies with cheaper valuations tend to have lower implied duration as well, making them more resilient to continued rate increases.”

– Bloomberg Equity Analyst, Christopher Cain, September 23, 2022

A Doggy Diamond In the Rough with an Attractive Relative Yield
  • Elevated US government yields and a stronger dollar have weighed heavily on stocks year-to-date, with the S&P 500 once again tipping into bear market territory with inflation remaining sticky. As fixed income investors also continue to feel the pain of rising rates and inflation, stocks with elevated yields relative to the 2/10-Year Treasury strip and positive expected earnings growth have tended to outperform year-to-date for their attractive relative yields and depressed valuations.

  • SDOG’s deep-value portfolio exhibits a trailing 12-month (TTM) price/earnings (P/E) ratio of 9.8x against the S&P 500 index’s TTM P/E of 18.1x, with an excess TTM dividend yield of nearly 280 basis points (bps)**. As of last week end, ~64% of SDOG’s deep-value holdings exhibited a higher yield than the US 2-Year Treasury yield of 4.20%, while 82% of SDOG’s deep-value holdings exhibited a higher yield than the US 10-Year Treasury yield of 3.68%. This bodes well for SDOG as investors gravitate to stocks that show yields in excess of Treasury yields to protect against waning purchasing power due to elevated inflation.

20220926-chart

  • As of 09/23/2022, 32 out of 50 holdings (64%) in SDOG have a higher yield than the US 2-Year government bond yield of 4.20%, compared to only 59 out of 503 (11.73%) for the S&P 500 Index**.

  • Notably, since 2019, SDOG’s holdings have grown their annual dividends by 7.5% per year, signaling consistent profitability, while the S&P 500 Index has grown dividends by only 4.0% per year**.

** Source: Bloomberg, as of 09/23/2022

Performance Summary
  1 Week YTD 1 Y 3 Y
ALPS Sector Dividend Dogs ETF (SDOG) -4.51% -10.02% -5.39% 20.26%
S-Network Sector Dividend Dogs Index - TR -4.50% -9.84% -5.08% 21.61%
S&P 500 Index - TR -4.63% -21.62% -15.73% 29.62%


Source: Bloomberg L.P., as of 09/23/2022

Performance data quoted represents past performance. Past performance is no guarantee of future results so that shares, when redeemed, may be worth more or less than their original cost. The investment return and principal value will fluctuate. Current performance may be higher or lower than the performance quoted. For current month-end performance call 1-866-759-5679 or visit www.alpsfunds.com. Performance includes reinvested distributions and capital gains.

For standardized performance please click here.

Top 10 Holdings
AbbVie Inc 2.22%   FirstEnergy Corp 2.12%
Bristol-Myers Squibb Co 2.21%   Gilead Sciences Inc 2.11%
Conagra Brands Inc 2.19%   Newmont Corp 2.10%
Lockheed Martin Corp 2.15%   International Business Machines Corp 2.08%
Huntington Ingalls Industries Inc 2.15%   Philip Morris International Inc 2.07%


As of 09/23/2022, subject to change

Important Disclosures & Definitions

An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus containing this and other information, call 1-866-759-5679 or visit www.alpsfunds.com. Read the prospectus carefully before investing.

Shares are not individually redeemable. Investors buy and sell shares on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 5,000, 25,000 or 50,000 shares.

Performance data quoted represents past performance. Past performance is no guarantee of future results; current performance may be higher or lower than performance quoted.

All investments are subject to risks, including the loss of money and the possible loss of the entire principal amount invested. Additional information regarding the risks of this investment is available in the prospectus.

The Fund is subject to the additional risks associated with concentrating its investments in companies in the market sector.

Diversification does not eliminate the risk of experiencing investment losses.

The Fund employs a “passive management” - or indexing - investment approach and seeks investment results that correspond (before fees and expenses) generally to the performance of its underlying index. Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell or buy a security unless that security is removed from or added to the underlying index, respectively.

Basis Point (bps): a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

Dividend Yield: a financial ratio that shows how much a Fund pays out in dividends each year relative to its share price.

Free Cash Flow (FCF) Yield: a financial solvency ratio that compares the free cash flow per share a company is expected to earn against its market value per share.

Price/Earnings (P/E) Ratio: a valuation ratio of a company's current share price compared to its per-share earnings.

Trailing 12-Month Yield: refers to the percentage of income a portfolio has returned to investors over the last 12 months.

US Treasury Yield: the yield that the US government pays investors that purchase a specific security.

S&P 500 Index: widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

S-Network Sector Dividend Dogs Index (SDOGX): a rules-based index intended to give investors a means of tracking the overall performance of the highest dividend paying stocks in the S&P 500 on a sector-by-sector basis.

One may not invest directly in an index.

ALPS Advisors, Inc. is affiliated with ALPS Portfolio Solutions Distributor, Inc.

ALPS Portfolio Solutions Distributor, Inc. is the distributor for the Fund.

Not FDIC Insured • No Bank Guarantee • May Lose Value

DOG001231 12/26/2022

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