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Summary These four dividend ETFs include 3 with extremely high dividend yields for an equity fund without REITs. SDOG comes up as my favorite after I looked through the allocation strategies each fund was using. FVD reports a net expense ratio of .65% in their fact sheet. Yahoo reports a .70% net ratio for the fund. With the exception of SDOG, the ETFs currently have very high allocations to the consumer defensive sector and the utility sector. 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. Ticker Name Index SDOG ALPS Sector Dividend Dogs ETF S-Network® Sector Dividend Dogs Index FDL First Trust Morningstar Dividend Leaders Index ETF Morningstar Dividend Leaders Index PEY PowerShares High Yield Equity Dividend Achievers Portfolio ETF NASDAQ US Dividend Achievers® 50 Index FVD First Trust Value Line Dividend ETF Value Line(R) 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. Dividend Yields I charted the dividend yields from Yahoo Finance for each portfolio. The First Trust Value Line Dividend ETF is the weakest of the batch on dividend yields. The yield isn’t weak overall, but it is lower than I would have expected. (click to enlarge) Expense Ratios The expense ratios run from .40% to .70% according to Yahoo Finance. (click to enlarge) I thought the expense ratio for FVD seemed a little too high at .70% so I decided to pull up their Fact Sheet through MorningStar which indicates a net expense ratio of .65%. For consistency sake I’ve stuck with the values reported by Yahoo in the chart, but it appears the fund is reporting a lower net expense ratio. I also checked the ETF through Charles Schwab and saw a .65% ratio there. Sector 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 FDL and PEY get some immediate respect from me for their very high allocations to the consumer defensive sector. It is also notable that FLD, PEY, and FVD all use heavy allocations to utilities. While several dividend ETFs include at least some allocation to real estate, there was a 0% allocation for the first 3 ETFs. As we get into ETFs with higher expense ratios, it is worth noting that many may have more complicated weighing structures that will materially vary over time and therefore the investor needs to either buy in completely to the strategy of the fund or keep an eye on the sector allocations or both to prevent becoming overweight on specific sectors. SDOG SDOG uses the most even allocation strategy out of all the funds. I have to admit that I like that part of their strategy. I wondered if that was random chance or if the company was doing it intentionally, so I pulled up the quarterly factsheet . It turns out that this is an intentional choice and that the portfolio is designed to maintain that allocation: “SDOG provides high dividend exposure across all 10 sectors of the market by selecting the five highest yielding securities in each sector and equally weighting them. This provides diversification at both the stock and sector level.” FDL The allocations for FDL feel pretty heavy on communication services to me, but each fund here changes their positions materially over time. The process for building the index includes a “Proprietary multi-step screening process”. There are a couple other comments, but in general it seems the system is designed to create a bit of a black box. Investors that want to read further into it can check out the fact sheet . PEY PEY is based on the NASDAQ U.S. Dividend Achievers 50 Index. Both the fund and index are reconstituted each year in March and the positions are rebalanced on a quarterly basis. Again, it is possible for the sector allocations to change materially which makes it important to look into the positions regularly. I appreciate funds that opt for a strategy with more rationality behind it than “the portfolio is market-cap weighted, we don’t do anything”. On the other hand, when the fund does not appear to be using strict sector weight limits it creates some risk of having more concentration than I would want in the portfolio. The yield is great and I really like the current allocations, but there is a material risk of the portfolio changing significantly in March. On the positive side, since the index is only reconstituted once in March each year investors can take a look at which securities were selected and decide if they feel comfortable holding that portfolio. If the investor believes in rebalancing, then the expense ratio on the fund may be significantly cheaper than the commissions the trader would incur. FVD The allocation process for FVD is also fairly complex. The index is based on whittling down the available universe of stock securities based on their Value Line® Safety Rating. After the available universe has been screened, the fund picks the companies with dividend yields that are higher than average for the S&P 500. To avoid allocation to smaller companies, anything with a market cap below $1 billion is removed from consideration. What do You Think? After looking through the allocation strategy for each fund, I think SDOG is my favorite of the batch. Which dividend ETF makes the most sense for you? Scalper1 News
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