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Summary These four dividend ETFs have similar expense ratios but substantially different holdings. DVY looks like the ETF with the highest chance to go on sale in December if the Fed Funds rate is increased. DVY and DTN have zero exposure to real estate which may be favorable for investors concerned about income taxes on REITs. One of the areas I frequently cover is ETFs. I’ve been a large proponent of investors holding the core of their portfolio in high quality ETFs with very low expense ratios. The same argument can be made for passive mutual funds with very low expense ratios, though there are fewer of those. In this argument I’m doing a quick comparison of several of the ETFs I have covered and explaining what I like and don’t like about each in the current environment. The Four ETFs Ticker Name Index QDF FlexShares Quality Dividend Index ETF Northern Trust Quality Dividend Index DHS WisdomTree Equity Income ETF WisdomTree High Dividend Index DTN WisdomTree Dividend ex-Financials ETF WisdomTree Dividend ex-Financials Index DVY iShares Select Dividend ETF Dow Jones U.S. Select Dividend Index By covering several of these ETFs in the same article I hope to provide some clarity on the relative attractiveness of the ETFs. One reason investors may struggle to reconcile positions is that investments must be compared on a relative basis and the market is constantly changing which will increase and decrease the relative attractiveness. For investors that want to see precisely which assets I’m holding, I opened my portfolio near the end of November. Dividend Yields I charted the dividend yields from Yahoo Finance for each portfolio. The FlexShares Quality Dividend Index ETF is the weakest of the batch on dividend yields, but I wouldn’t consider 2.78% even remotely bad. That is a very respectable dividend yield for an equity portfolio that is not focused on carrying REITs, BDCs, or other very high yield investments. The two WisdomTree funds both come in with very high dividend yields. (click to enlarge) Expense Ratios These funds are all extremely similar on expense ratios. (click to enlarge) Sector Even if an investor was going to focus on dividend yields, there are three funds with yields that are materially above 3%. The expense ratios are also very similar which reinforces that investors need to be looking at the sector allocations to make the determination of which ETF makes the most sense for them. I built a fairly nice table for comparing the sector allocations across dividend ETFs to make it substantially easier to get a quick feel for the risk factors: (click to enlarge) First Glance I imagine most readers looking at that glance first noticed the exceptionally tall purple bar representing the utility allocation for DVY. This is a dividend growth fund that has a fairly huge allocation to the utility sector. DVY DVY uses a very heavy allocation to utilities. For investors that already build their own utility positions in their portfolio, this wouldn’t be a great fit since it would double up on the exposure. On the other hand, for the investor that does not have utility exposure in their portfolio, the ETF could be a great fit. The utility sector often demonstrates some correlation with bonds because investors treat it as an alternative source of income. This may be a fairly volatile sector going into December because investors are expecting the Federal Reserve to raise rates and if a rate increase is confirmed it could send bond yields higher and utility stocks would be expected to fall at the same time so that the dividend yields would increase. I won’t be surprised if the Federal Reserve raises rates in December, but if they manage to raise rates 5 more times within the next year and a half I would be quite surprised. I don’t expect great results on the increase in rates, so I don’t think the following years will see further increases. I wouldn’t be surprised if see the Federal Reserve’s short term rate fall back to 0% before it makes it up to 1%. DTN and DVY In addition to being heavy on utilities, DVY joins DTN in having no allocation to real estate. I don’t mind the exclusion of real estate since I expect many investors may want to use this kind of dividend growth ETF in a taxable account while pushing their REIT exposure into a tax exempt account. For an investor putting a large part of their portfolio in either of these ETFs, it would be reasonable to look for some exposure to REITs somewhere else in the portfolio. I’m using equity ETFs for around 20% to 25% of my portfolio and I may look to increase that in December and going into next year if the REITs are on sale following an increase in the Fed Funds rate. DTN also has virtually no exposure to the financial services sector. Since their name includes “ex-Financials”, I think that makes a great deal of sense. DTN would fit best in a portfolio where the investor was manually choosing their own bank stocks and REITs for the portfolio. QDF QDF offers the lowest dividend yield and when I look at the sector allocations it appears fairly aggressive for a dividend portfolio. The allocation to utilities and consumer defensive are both fairly low and in both cases QDF has the lowest allocation in the portfolio. In my opinion, the best scenario for QDF relative to the other ETFs would be a longer bull market where more aggressive allocations would be rewarded. Compared to an actual aggressive allocation, this would be fairly tame but when compared to other high yield portfolios it is less defensive. What do You Think? Which dividend ETF makes the most sense for you? Do you use DVY to get your utility allocation, or do you pick your own utilities (or use a different ETF)? Is the dividend yield on DVY or DTN enough to bring you into the ETF? The only major weakness I see for this batch of ETFs is that the expense ratios are higher than I would like to see. However, when choosing between these four ETFs the ratios are very comparable. Scalper1 News
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