When it comes to dividend exchange-traded funds, investors
have plenty of choices. Its absurd how many there
are, says Samuel Lee, an ETF strategist with
Chicago-based Morningstar and editor of Morningstar
ETFInvestor, a monthly newsletter. Of the 1,660 ETFs
available to U.S. investors, 95 focus on dividends, making them
the most popular category in the equity strategy space, he
Lee describes the market as saturated, but all 95 funds have
garnered impressive assets, from the $24.4 billion Vanguard
Dividend Appreciation ETF (VIG) down to the EGShares Emerging
Markets Dividend Growth ETF (EMDG), offered by Emerging Global
Advisors of New York, with some $1 million.
Morningstars database shows a dizzying array of
variations on the dividend theme slices of different
markets in the U.S. and worldwide. But that hasnt stopped
sponsors from trying to build a better ETF by harnessing
everything from active management to custom indexes.
Even with passively managed funds, there are many ways to
create a dividend-focused portfolio. The compositions
differ drastically, resulting in big performance
differences, says Spencer Bogart, an ETF specialist at
news and analysis site ETF.com in San Francisco.
One of the first actively managed equity ETFs has thrived:
The Cambria Shareholder Yield ETF (SYLD), launched in May 2013
by El Segundo, Californiabased Cambria Investment
Management, had $225.5 million in assets and a one-year total
return of 14.06 percent as of September 29. Im
happy wearing the crown in what is a very small kingdom for
now, says Mebane Faber, one of the funds two
Cambria doesnt just look at dividends; it seeks
businesses that are buying back shares and paying down debt.
Faber believes that given the demand for yield in a
low-interest-rate environment, the U.S. market for
high-dividend stocks has been pushed to unreasonable levels, so
it would be foolish to ignore the cash infusion
from buybacks. We look for a holistic composite of the
two, he says.
AdvisorShares Investments of Bethesda, Maryland, the largest
sponsor of actively managed ETFs, with 28 in total, launched
its Athena High Dividend ETF (DIVI) on July 29. The fund has
already gained $8.7 million in assets, even though it has a
relatively high expense ratio of 99 basis points.
One of AdvisorShares guru funds, Athena is
managed by C. Thomas Howard, CEO and director of research at
AthenaInvest in Greenwood Village, Colorado. An emeritus
professor of finance at the University of Denver, Howard uses a
behavioral finance approach to identify mutual fund
managers high-conviction picks.
Athena has the freedom to invest domestically and
internationally in a wide range of dividend-producing
securities, including not just stocks but also real estate
investment trusts, master limited partnerships, closed-end
funds and business development corporations.
The portfolio will also be weighted toward the
highest-yielding securities, according to Noah Hamman, founder
and CEO of AdvisorShares. Were trying to offer an
income-oriented solution, he says. I think everyone
agrees theres a growing concern about interest rate risk
in a traditional bond portfolio.
How dividend ETFs weight their portfolios matters a great
deal, ETF.coms Bogart says. Take the $210.5 million
Global X SuperDividend U.S. ETF (DIV), launched in March 2013
by New Yorkbased Global X Funds. As of September 29 the
fund had outperformed many of its peers with a distribution
yield of 5.31 percent and a one-year total return of 23.40
percent, thanks to a significant overallocation to
utilities, which make up about 25 percent of its portfolio,
DIV is passively managed based on an index designed by
Global X, says co-founder and CEO Bruno del Ama. The firm
didnt set out to overweight its portfolio toward
utilities, but that was the result when its formula was
applied, he explains. We dont focus on long-term
track records of paying and increasing dividends for five or
ten years, del Ama says of the difference between DIV and
many other dividend ETFs. We focus on the most recent
dividend payment and whats expected for the coming
Likewise, the $132.9 million WisdomTree U.S. Dividend Growth
Fund (DGRW), launched in May 2013, takes a forward-looking
view. Its current distribution yield is 2.86 percent, with a
22.85 percent one-year return as of August 31.
WisdomTree Investments, which also designs its own indexes,
has developed a formula aimed at capturing new,
up-and-coming dividend payers, asserts Jeremy Schwartz,
the New Yorkbased firms director of research.
Requiring that a company have a five-, ten- or even 20-year
history of paying dividends before it can be part of an index
excludes noteworthy players new to the dividend game, like
Apple (2012), Cisco Systems (2011) and Oracle Corp. (2009), and
can shut them out for some time, Schwartz says. Unlike the
typical dividend ETF, which looks backward, DGRW has a 22.2
percent weighting in information technology.
Looking forward isnt really a new concept,
Morningstars Lee points out. He cites Vanguard
Groups second-largest dividend ETF, the $13 billion
Vanguard High Dividend Yield ETF (VYM). VYM passively follows
the FTSE High Dividend Yield index, which looks at the prospect
for dividends over the next 12 months.
The edge that taking a forward-looking approach can give
right now is evident in the difference in returns between VYM
and Vanguard Dividend Appreciation ETF (VIG). VYM, whose No. 1
holding is Apple in a portfolio thats 17.6 percent
weighted toward technology, had an 8.93 percent return
year-to-date through September 29; VIG, which has Johnson &
Johnson as its top holding and favors industrials and consumer
goods, gained just 4.14 percent.
Both ETFs launched in 2006, but they have very
different investment philosophies, notes Douglas Yones,
head of domestic equity index and ETF product management at
Vanguard in Malvern, Pennsylvania. With VIG, companies must
have a ten-year history of increasing dividends, so VYM was
created to capture the companies that pay above-average
dividends but lack that track record, he explains.
Asset management giant BlackRocks
iShares group debuted its iShares Core Dividend Growth ETF
(DGRO) in June. The $71.2 million funds predecessor, the
iShares Core Dividend Yield ETF (HDV), has grown to $4.43
billion since it launched in March 2011. As of September 29,
HDV had gained 9.79 percent on the year; DGRO had a three-month
return of 71 basis points.
Both funds draw from the same universe of U.S. companies
that have grown their dividends over the past five years, but
DGRO applies another screen intended to measure the
sustainability of dividend growth, says Rene Casis,
a San Franciscobased director with the iShares product
team. That screen will exclude the top decile of dividend
payers under a formula by which a companys payout ratio
must be less than 75 percent of earnings.
Doing so ensures that a company can comfortably pay at
a growing rate, Casis says. He notes that even though
DGRO cuts out that top decile, it will compensate by covering a
much broader group of 250 companies versus HDVs 75. By
focusing too narrowly on the top dividends, investors can fall
into a trap, Casis contends: Companies that pay the
highest dividends may perhaps have a problem of being riskier
in nature, especially if the stock price comes under pressure
or they experience cash-flow issues.
Get more on