Dividend + Durable Growth Equities: A Recipe for Success

Executive Summary:

• Equity markets have continued to reflect a backdrop of fits and starts as investors shift from higher growth stocks towards quality companies with dividend appreciation profiles, and vice versa, based on prevailing conditions.
• This has proven a common theme over the past decade as dividend and durable growth equities have exhibited negative correlation of rolling excess returns to one another (against the broad market). This signals that diversification benefits exist in allocating across both groups.
• Given this dynamic, we believe pairing the Harbor Dividend Growth Leaders ETF (ticker: GDIV) with the Harbor Capital Appreciation Fund or Harbor Long-Term Growers ETF (ticker: WINN) could likely provide complimentary advantages for potentially volatile conditions ahead.
• The strategies have exhibited divergent excess return streams, have relatively low levels of holdings overlap, and reside in opposing upside/downside capture ratio quadrants. Most importantly, a 50% / 50% blended portfolio comprised of both strategies has resulted in consistent outperformance versus the S&P 500 Index.
• Standardized performance for the strategies discussed in this article can be found in the table below.

Performance data shown represents past performance and is no guarantee of future results. Past performance is net of management fees and expenses and reflects reinvested dividends and distributions. Past performance reflects the beneficial effect of any expense waivers or reimbursements, without which returns would have been lower. Investment returns and principal value will fluctuate and when redeemed may be worth more or less than their original cost. Returns for periods less than one year are not annualized. Current performance may be higher or lower and is available through the most recent month end at harborcapital.com or by calling 800-422-1050.

Introduction

U.S. equity investors remain off balance in today’s environment given the frictional implications of elevated global recession risk versus moderating inflation and a potentially less hawkish stance from the Federal Reserve (Fed). One on hand, increased possibility of a hard landing ushered in by aggressive monetary policy tightening, slowing economic growth and rising unemployment has driven investors towards higher quality equities with dividend appreciation profiles. On the other hand, enhanced valuation opportunities, expected widespread scarcity of earnings growth, and a possible Fed pivot are enticing investors back towards higher growth equities.

While its drivers have varied over time, this imbalance has been relatively persistent over the past decade. The chart below shows that the rolling 1-year excess returns of the S&P 500 Growth and S&P U.S. Dividend Growers indices versus the broad market (S&P 500 Index) have generally exhibited an inverse relationship over the last ten years. In fact, the correlation of rolling 1-year excess returns between the S&P 500 Growth and S&P U.S. Dividend Growers indices was -0.28 over this period. This signals that maintaining exposure to both dividend and durable growth equities can potentially provide enhanced diversification benefits, particularly given a murkier investment outlook for 2023 and beyond.

Pairing Dividend & Durable Growth Equities with Harbor:

Looking ahead, we believe pairing the Harbor Dividend Growth Leaders ETF (ticker: GDIV) with the Harbor Capital Appreciation Fund or Harbor Long-Term Growers ETF (ticker: WINN) could likely provide complimentary advantages for potentially volatile conditions ahead. On one hand, the Westfield Capital managed Harbor Dividend Growth Leaders ETF provides investor access to companies with growing dividend streams and downside support. On the other hand, the Jennison Associates sub-advised Harbor Capital Appreciation Fund and Harbor Long-Term Growers ETF enable investor exposure to companies they believe offer sustainable growth profiles in a scarcity of growth environment moving forward.

Importantly, correlation of excess returns between the Harbor Dividend Growth Leaders ETF and the Harbor Capital Appreciation Fund (versus the S&P 500 Index) has been -0.37 over their common inception period (8/1/2013). Also, the strategies have exhibited relatively low overlap of holdings to one another as of 12/31/2022 (please refer to the table below).

Given their divergent excess return profiles and relatively distinct positioning, the strategies have exhibited opposing upside/downside capture ratio profiles. Per the chart below, the Harbor Dividend Growth Leaders ETF has resided in the southwest quadrant from an up/down capture perspective. This means that GDIV has outperformed in market drawdowns over the 3-year, 5-year and common inception periods. Conversely, the Harbor Capital Appreciation Fund has plotted in the northeast quadrant, outperforming in up markets over the same time frames.

Blending both strategies’ stylistic variations and divergent excess return streams has resulted in consistent outperformance versus broad market equities. Per the chart below, a 50% / 50% blended portfolio comprised of GDIV and the Harbor Capital Appreciation Fund (rebalanced quarterly) has outperformed the S&P 500 Index in 73.1% of rolling 3-year periods and 90.7% of rolling 5-year periods since the common inception period (computed monthly). In addition, the blended portfolio generated average excess returns of +1.6% and +1.8% over these rolling 3-year and 5-year periods, respectively.

Performance data shown represents past performance and is no guarantee of future results. Past performance is net of management fees and expenses and reflects reinvested dividends and distributions. Past performance reflects the beneficial effect of any expense waivers or reimbursements, without which returns would have been lower. Investment returns and principal value will fluctuate and when redeemed may be worth more or less than their original cost. Returns for periods less than one year are not annualized. Current performance may be higher or lower and is available through the most recent month end at harborcapital.com or by calling 800-422-1050.

Conclusion:

Overall, markets continue to reflect a backdrop of fits and starts as investors shift from higher growth stocks towards quality companies with dividend appreciation profiles, and vice versa, based on prevailing conditions. This has proven a common theme over the past decade as dividend and durable growth equities have exhibited negative correlation of rolling excess returns to one another (against the broad market). This signals that diversification benefits exist in allocating across both groups.

Given this dynamic, we believe pairing the Harbor Dividend Growth Leaders ETF (ticker: GDIV) with the Harbor Capital Appreciation Fund or Harbor Long-Term Growers ETF (ticker: WINN) could likely provide complimentary advantages for the road ahead. The strategies have exhibited divergent excess return streams, have relatively low levels of holdings overlap, and reside in opposing upside/downside capture ratio quadrants. Most importantly, a 50% / 50% blended portfolio comprised of both strategies has resulted in consistent outperformance versus the S&P 500 Index.

For more information, please access our website at www.harborcapital.com or contact us at 1-866-313-5549.

For Institutional Use only

Important Information

The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice or a current or past recommendation or solicitation of an offer to buy or sell any securities or to adopt any investment strategy.

Investors should carefully consider the investment objectives, risks, charges, and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborcapital.com or call 800-422-1050. Read it carefully before investing.

Investing involves risk, principal loss is possible. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. The ETFs are new and have limited operating history to judge.

Shares are bought and sold at market price not net asset value (NAV). Market price returns are based upon the closing composite market price and do not represent the returns you would receive if you traded shares at other times.

The S&P 500 Index is an unmanaged index generally representative of the U.S. market for large capitalization equities.

The S&P U.S. Dividend Growers Index is designed to measure the performance of U.S. companies that have followed a policy of consistently increasing dividends every year for at least 10 consecutive years. The index excludes the top 25% highest-yielding eligible companies from the index.

The S&P 500 Growth Index is a subset of the S&P 500 Index, generally representative of U.S. large capitalization growth equities.

Indices listed are unmanaged, do not reflect fees and expenses and are not available for direct investment.

(GDIV) Investments involve risk including the possible loss of principal. There is no guarantee the investment objective of the Fund will be achieved. The Fund's emphasis on dividend paying stocks involves the risk that such stocks may fall out of favor with investors and under-perform the market. There is no guarantee that a company will pay or continually increase its dividend. The Fund may invest in a limited number of companies or at times may be more heavily invested in particular sectors. As a result, the Fund's performance may be more volatile, and the value of its shares may be especially sensitive to factors that specifically effect those sectors. The Fund may invest in foreign securities which may be more volatile and less liquid due to currency fluctuation, political instability, government sanctions, social and economic risks. Foreign currencies can decline in value and can adversely affect the dollar value of the fund.

(HACAX) There is no guarantee that the investment objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. At times, a growth investing style may be out of favor with investors which could cause growth securities to underperform value or other equity securities. Since the Fund may hold foreign securities, it may be subject to greater risks than funds invested only in the U.S. These risks are more severe for securities of issuers in emerging market regions.

(WINN) All investments involve risk including the possible loss of principal. There is no guarantee that the investment objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. At times, a growth investing style may be out of favor with investors which could cause growth securities to underperform value or other equity securities. Since the Fund may hold foreign securities, it may be subject to greater risks than funds invested only in the U.S. These risks are more severe for securities of issuers in emerging market regions. A non-diversified Fund may invest a greater percentage of its assets in securities of a single issuer, and/or invest in a relatively small number of issuers, it is more susceptible to risks associated with a single economic, political, or regulatory occurrence than a more diversified portfolio.

Diversification does not assure a profit or protect against loss in a declining market.

Harbor Dividend Leaders ETF (GDIV): ETF performance prior to 5/23/22 is attributable to the Westfield Capital Dividend Growth Mutual Fund, Institutional Share class and/or Westfields private investment vehicle. The historical NAV of the predecessor are used for both NAV and Market Offer Price performance from inception to ETF listing date. Performance periods since GDIV listing date may contain NAV and MOP data of both the newly formed ETF and the predecessor fund performance. Please refer to the Fund prospectus for further details.

Harbor Dividend Growth Leaders ETF (GDIV): Top Ten Holdings can be found here.

Harbor Capital Appreciation Fund (HACAX): Top Ten Holdings can be found here.

Harbor Long-Term Growers ETF (WINN): Top Ten Holdings can be found here.

Jennison Associates LLC is an independent subadvisor to the Harbor Capital Appreciation Fund and the Harbor Long-Term Growers ETF.

Westfield Capital Management is an independent subadvisor to the Harbor Dividend Growth Leaders ETF.

Mutual Funds are distributed by Harbor Funds Distributors, Inc.

Foreside Fund Services, LLC is the Distributor of Harbor ETFs.

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