There are few parts of the equity market that are positive year-to-date, but some dividend-focused ETFs are off to a relatively strong start.
While the cap-weighted SPDR S&P 500 ETF Trust (SPY) is down nearly 6% for the year, some dividend ETFs focused on the large cap space have seen gains 2-3%.
Dividend ETFs are not a homogenous group. Some, like the ones in the chart above, are focused on high dividend companies, while others focus on how long a company has maintained or grown dividends. And each has its own way of targeting such companies and weighting the resulting portfolio.
The WisdomTree U.S. High Dividend Fund (DHS) and the iShares Core High Dividend ETF (HDV) use dividend-weighting for their portfolios, whereas the SPDR Portfolio S&P 500 High Dividend ETF (SPYD) uses equal-weighting.
DHS’s and HDV’s outperformance of SPYD so far this year therefore emphasizes how markets are rewarding high dividend payers so far this year.
One major factor boosting the returns of high dividend funds right now is their allocation to the energy sector, having 3-5X as much exposure as the broad market SPY.
|DHS||WisdomTree U.S. High Dividend Fund||16.80%|
|HDV||Shares Core High Dividend ETF||19.60%|
|SPYD||SPDR Portfolio S&P 500 High Dividend ETF||13.00%|
|SPY||SPDR S&P 500 ETF Trust||3.50%|
Energy has been the bright spot in the market so far in 2022, with the Energy Select Sector SPDR Fund (XLE) gaining more than 24% year-to-date.
In fact, energy was the only sector to finish in positive territory for the month of January. Oil prices are at their highest level in years, helping boost returns for associated equities.
International Even Better
Similar to domestic markets, international markets have also struggled to start the year. Both the iShares MSCI ACWI ex U.S. ETF (ACWX) and the iShares MSCI Emerging Markets ETF (EEM) have notched negative returns.
But investors who are willing to look overseas for yield are faring even better. Some of the best-performing dividend ETFs of the year take an international or global approach.
The Pacer Global Cash Cows Dividend ETF (GCOW) tracks an index of developed market large cap stocks, selected by free cash flow yield and dividend yield, and weighted by aggregate dividends. The result is a portfolio with one-third in domestic equities and two-thirds of the portfolio in international equities, with double-digit weightings to the United Kingdom and Japan.
Courtesy of FactSet
The Fidelity International High Dividend ETF (FIDI) and the WisdomTree Emerging Markets High Dividend Fund (DEM) are similarly focused on identifying high-yielding companies, but take a more regional focus on either developed or emerging market equities.
Overall, international and emerging market indexes have a higher proportion of energy exposure relative to the U.S. But here, too, the energy allocations within these dividend funds are higher than their respective broad-based benchmarks.
|GCOW||Pacer Global Cash Cows Dividend ETF||15.40%|
|FIDI||Fidelity International High Dividend ETF||13.30%|
|DEM||WisdomTree Emerging Markets High Dividend Fund||10.90%|
|ACWX||iShares MSCI ACWI ex U.S. ETF||5.40%|
|EEM||iShares MSCI Emerging Markets ETF||5.80%|
While the ETFs listed thus far take a diversified approach to selecting high dividend companies, the category also offers energy-focused ETPs.
An ETF option would be the First Trust Indxx Global Natural Resources Income ETF (FTRI), which focuses on natural resources stocks that are selected by dividend yield and weighted by market cap. FTRI is a global ETF, with 52 holdings and only 20% of the portfolio held within U.S. companies.
There are also two ETN options, a structure that is common in commodity-focused funds.
The ETRACS NYSE Pickens Core Midstream Index ETN (PYPE) and the ETRACS Alerian Midstream Energy Dividend Index ETN (AMND) focus on midstream energy stocks, which refers to the phase in oil production that involves processing, storage and transportation to refineries and end users.
These ETNs have some of the highest returns year-to-date for the dividend-focused space. PYPE has gained 11.6% while AMND is up 12.4%.
Though these returns stand well above those of more diversified high dividend funds, investors should be wary of having too much exposure to the energy sector in a reach for yield. In other words, these products are best used as a complement to the core of the portfolio.