ALPS Plans High-Dividend GICS ETF

April 13, 2012

ALPS plans new dividend fund that would balance diversification with the quest for high yields.

ALPS Advisors filed paperwork with the U.S. Securities and Exchange Commission to bring to market a large-cap ETF that is diversified into 10 different sectors based upon the Global Industry Classification Standard (GICS).

The ALPS Sector Dividend Dogs ETF will select the five stocks in each of the 10 GICS sectors that make up the S&P 500 that offer the highest dividend yields on a sector-by-sector basis. Dividend yield is computed based on the regular cash dividends paid by the company over the previous 12-month period, divided by the share price.

While dividend-focused ETFs have been all the rage in the past year or so as investors seek some sort of protection from market volatility that has reared its head again and again since the 2008 crash, some analysts have reservations about high-dividend ETFs because they tend to underweight areas like technology, energy and financials, making their portfolios less diversified.

Last month, IndexUniverse ETF Analyst Carolyn Hill took issue with that view in a blog, noting that the historical dividend yields of sector SPDR funds were 1.6 percent on technology and 1.7 percent on financials, whereas utilities returned 4.2 percent and consumer staples returned 3.0 percent.

Carolyn’s observation makes clear that a high-dividend fund organized around a full complement of GIC sectors could be a bit of a compromise for investors seeking high yields.

The question for investors is whether giving up a little yield is worth picking up more diversification. After all, dividend funds aren’t just about the dividends. The stock price makes up part of the total return too.

Whether investors seek to capture returns from outperforming industries, or protect their portfolios from the wrong end of the business cycle, a broadly diversified fund of sectors might provide the tools to find and exploit the signals present in the noise of the broad market.

The underlying index like the S&P 500 is divided into 10 GICS sectors:

  • Energy
  • Materials
  • Industrials
  • Consumer Discretionary
  • Consumer Staples
  • Health Care
  • Financials
  • Information Technology
  • Telecommunications
  • Utilities

The Index

Dividend Dogs passively tracks its underlying index, which has a fixed number of 50 constituents on each annual reconstitution date, the third Friday of December each year. The 50 stocks that are selected for inclusion in the fund’s underlying index are equally weighted and rebalanced quarterly.

The Dividend Dogs ETF will seek a correlation of 95 percent or better between the ETF’s performance and that of its underlying index.

Dividend Dogs may sell securities that are represented in its underlying index or purchase securities that are not yet represented in the index in anticipation of their removal or addition.

One of the most significant risks of investing in this fund is that it while it may hold securities of companies that have historically paid a high dividend yield, those companies may reduce or discontinue their dividends, thus reducing the yield of the ETF. Low-priced securities in the ETF may be more susceptible to these risks, according to the prospectus.

ALPS didn’t list a ticker or an expense ratio in its filing.

 

 

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