In addition, SDIV equally weights its 100 holdings, while FGD weights its holdings by dividend yield. These divergent steps in the selection and weighting process produce vastly different exposures that have tangible consequences on the relative risk and return profile of each fund.
To highlight this, look no further than a near 4-percentage-point performance gap between the two funds over the past year. We would of course be remiss if we didn’t point out that SDIV’s current 6.45 percent yield is more than 2 percentage points greater than the yield on FGD.
And let’s not forget: This is, after all, a high-dividend-yield segment.
On a sector basis, SDIV is very heavily weighted to financials, specifically REITs. The sector makes up 39 percent of SDIV’s portfolio compared with just 18 percent for FGD. The heaviest-weighted sector in FGD is telecoms, at 24 percent, while telecoms make up just 12 percent of SDIV’s portfolio. FGD also has a notable bias to industrials, proving neither portfolio is patently cyclical or defensive.
The regional exposure each fund offers is also distinct. Thanks to its developed-market focus, FGD has a strong bias to Europe—54 percent of the portfolio, compared with 38 percent for SDIV—which comes largely at the expense of Asia and North America.
As such, FGD will be much more sensitive to changes in the value of the euro, pound and franc, while SDIV has much more balanced currency exposure. Despite the eligibility of emerging markets in SDIV’s selection process, the developing world accounts for just 6 percent of its portfolio.
When regressed against our global dividend benchmark—the MSCI ACWI High Dividend Yield Index—which has more than 500 holdings, both exhibit extremely weak fits as measured by R-squared.
Given the low correlation of the two portfolios to our benchmark, it’s hard to make a definitive judgment as to which fund carries more risk.
That said, SDIV has 38 percent of its portfolio in small- and micro-caps compared with just 17 percent in FGD, and an average market capitalization of its constituents that’s roughly half the $22 billion average market cap on FGD. All else being equal, these smaller stocks carry higher volatility, which could translate to elevated risk in SDIV.
Because of the similarity in costs, the choice between SDIV and FGD comes down to exposure.
In that case, investors seeking yield above all else will likely prefer SDIV, just as those seeking a more balanced geographic profile would probably choose SDIV too.
But those concerned with dividend stability and sustainability will prefer FGD. And FGD is also likely to be favored by those banking on a continued rebound in European equities.
Both are viable choices, but distinct enough to make doing your homework an absolute must.
At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at [email protected].