In contrast, HDV, as well as the First Trust Morningstar Dividend Leaders (NYSEArca: FDL), the WisdomTree Equity Income Fund (NYSEArca: DHS), the Vanguard High Dividend Yield ETF (NYSEArca: VYM) and the First Trust Value Line Dividend ETF (NYSEArca: FVD) are more flexible and allow for the faster addition of companies that have only recently started paying dividends.
The clearest illustration of this difference is Apple, which announced a $2.65 quarterly dividend a few months ago. That dividend puts Apple in the top tier of dividend payers, but it won’t be captured by SDY—the State Street payout fund—until 2037.
A second difference is how they weight their holdings. VYM, PFM and VIG all weight their holdings by market capitalization, while DVY, PEY, SDY, DHS, FDL and HDV all weight holdings based on their dividend payments. The last fund, FVD, weights its holdings equally.
These differences roll up into very different portfolios. The chart below shows the sector allocations of each dividend ETF.
The top performers all held heavy allocations to utilities, consumer non-cyclicals and health care—areas that have outperformed the market over the past year.
In contrast, the ETFs that didn’t do as well looked more like the market, which lost 1.54 percent over the last year.
Income is great, and certainly a significant factor to consider when choosing a dividend ETF. But it doesn’t tell the whole story.
If you’re looking for a defensive play, make sure the ETF you’re looking at actually has high allocations to traditionally defensive sectors.
It’s also worth thinking about whether you prefer an ETF of companies with a long history of payments or an ETF that has the flexibility to include new constituents quickly as more companies mature and announce significant dividend policies.
Such choices will shape your portfolio and returns going forward.
There’s no one “best” choice, only the one that makes the most sense for you.