DON: A Typical Mid-Cap ETF Presented As A Dividend ETF
Summary DON offers a dividend yield of 2.45%. It just isn’t high enough to make me think of this as a compelling dividend investment. The individual company allocations are reasonable for preventing diversifiable risk. The expense ratio is simply too high for my tastes. The sector allocation strikes me as being too volatile. Looking at historical performance confirms the higher volatility of the fund. It delivered great performance, but it was compensation for risk. The WisdomTree MidCap Dividend ETF (NYSEARCA: DON ) is a weird fund that doesn’t quite seem to go together for me. I’ve seen quite a few good dividend ETFs lately and started to wonder if my standards were simply slipping. It seems I was just due for finding one that didn’t work for me. Expenses The expense ratio is a .38%. This is quite a bit too high for my tastes. Dividend Yield The dividend yield is currently running 2.45%. Is that really a dividend ETF? I’m not convinced so far. Am I just having a grumpy night? Who knows, but I’m expecting dividend yields to exceed 2.5% even in this low interest rate environment. Some of my ETF holdings have yields over 2.5% without any emphasis on the dividend yield. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: (click to enlarge) The thing I do love about these allocations are that the diversification across individual companies is excellent. There are very few companies with a weight higher than 1%, so any scandal event would be unlikely to cost an investor a substantial portion of their portfolio. I do like seeing Coach (NYSE: COH ) as a top holding and I certainly don’t mind their dividend yield being greater than 4%. The question may be how many low dividend holdings are included in the fund to drive the fund yield below 2.5%? Mattel, Inc. (NASDAQ: MAT ) has a dividend yield greater than 6%. I’ll have to admit that when the dividend yield gets that high I have to start questioning the sustainability of the dividend. I prefer dividend growth to always be positive. Negative growth just doesn’t offer the same appeal. Darden Restaurants (NYSE: DRI ) is another solid yielding stock at 3.55% and they recently delivered a solid earnings beat from their “OG TO GO” program which allows customers to pick up food from Olive Garden to go. The program is excellent because it allows the company to expand the volume of sales without requiring substantial capital expenditures in new seating areas. Lately quite a few of the restaurants I cover have been trying to figure out how to deal with increased traffic because they just don’t have enough seating room. Of course, it is possible to handle that problem by raising prices but the competitive nature of the casual restaurant industry is incredibly fierce to companies that opt to give customers less value for their money. Sectors (click to enlarge) I don’t like it. That’s got to be one of the most frank assessments you’ve heard on sector allocations and it is precisely accurate. I really don’t like this sector allocation whatsoever for a dividend ETF. There is a very heavy emphasis on financials and consumer discretionary. The allocation to utilities is nice at 13%, and I don’t mind industrials at 14.04%, but I’d rather see financials and consumer discretionary at the bottom of the list. I’d like to see consumer staples and health care with heavy allocations. Neither of them got the nod. There is nothing wrong with this sector allocation for a typical mid-cap ETF , but I’d rather see it named along those lines. Generally speaking I find the mid-cap space to be more volatile than the large cap space and I’d rather feel that the holdings within that part of the market were going to be safer holdings. That makes me double down on the importance of using heavy allocations to consumer staples. This portfolio is designed in such a manner that makes it simply feel too risky for investors that are focused on dividends and growing their portfolio. I wouldn’t mind it as a simple “mid-cap” ETF, but it doesn’t work as a dividend ETF for me. When I ran a regression on the returns for DON with the returns for the S&P 500 as measured by the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), with a sample period going back to June 2006, the results were great for returns but bad for risk. DON returned a very impressive 119% in that period while SPY returned 101%. Clearly that strong performance is great, but the max drawdown was almost 62% compared to 55% for SPY and the annualized volatility for DON was higher. Simply put, I believe the excess returns here are strongly correlated to the excess risk. There is nothing wrong with a higher risk portfolio, but it doesn’t match the typical expectation of an investor hoping to drop their cash in and get a fairly safe and growing stream of dividend income. Conclusion This is a fine mid-cap ETF but it doesn’t make sense as a dividend ETF. The yield, the sector allocations, and the risk level demonstrated over the last 9 years or so are indicative of a more typical mid-cap ETF that is appropriate for aggressive investors with very bullish expectations about the future path of the economy. This is the kind of allocation I would be interested in buying when the market had crashed and already lost 40% of the total market value. If shares get that depressed, then this allocation would be much more acceptable for trying to catch the ride back up in equity prices. In my opinion, our market would have to fall quite a ways before I would want to start grabbing up those highly aggressive allocations. I can’t argue with the past returns, but the risk just doesn’t match up with my desires.