ETF Providers Keep Trying to Build a Better Dividend Fund

Recent U.S. offerings include actively managed ETFs and vehicles designed to capture companies new to dividends.


When it comes to dividend exchange-traded funds, investors have plenty of choices. “It’s 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 says.

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.

Morningstar’s database shows a dizzying array of variations on the dividend theme — slices of different markets in the U.S. and worldwide. But that hasn’t 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 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, California–based Cambria Investment Management, had $225.5 million in assets and a one-year total return of 14.06 percent as of September 29. “I’m happy wearing the crown in what is a very small kingdom for now,” says Mebane Faber, one of the fund’s two portfolio managers.

Cambria doesn’t 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. “We’re trying to offer an income-oriented solution,” he says. “I think everyone agrees there’s a growing concern about interest rate risk in a traditional bond portfolio.”

How dividend ETFs weight their portfolios matters a great deal,’s Bogart says. Take the $210.5 million Global X SuperDividend U.S. ETF (DIV), launched in March 2013 by New York–based 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, Bogart notes.

DIV is passively managed based on an index designed by Global X, says co-founder and CEO Bruno del Ama. The firm didn’t set out to overweight its portfolio toward utilities, but that was the result when its formula was applied, he explains. “We don’t 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 what’s expected for the coming year.”

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 York–based firm’s 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 isn’t really a new concept, Morningstar’s Lee points out. He cites Vanguard Group’s 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 that’s 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 BlackRock’s iShares group debuted its iShares Core Dividend Growth ETF (DGRO) in June. The $71.2 million fund’s 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 Francisco–based director with the iShares product team. That screen will exclude the top decile of dividend payers under a formula by which a company’s 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 HDV’s 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.”

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