Dividend ETFs: February Recap, And 10 Funds To Watch This March

Article Summary

Welcome to the sixth edition of my monthly dividend and income ETF series, where I summarize key metrics for 90 ETFs across the U.S. dividend, income, and risk management categories. As an introduction for new readers, I started this series to make it easy for investors to find the best ETFs to suit their unique investment objectives. Here’s a summary of what to expect.

I’ll also highlight ten dividend ETFs I’m watching this month as a bonus. But first, let’s go over how equity ETFs across all segments performed in February. The following table summarizes median periodic returns for over 800 ETFs in 40 categories, sorted from best to worst last month.

Total Market and Large-Cap Dividend ETFs

The best advice I can give dividend investors is to keep fees as low as possible. The power of compounding is often cited as a benefit of dividend investing, but remember that costs compound just the same. Larry Bates, the author of “Beat The Bank,” has a nifty online calculator that lets you easily see how much of your long-term gains are reduced by fees. Since dividend investing has a lot of crossover with value investing, the strategy requires patience and commitment, so set yourself up for success by defaulting to low-fee ETFs typically found in the total market and large-cap dividend space. Of the 31 funds listed below, the average expense ratio is 0.39%. Some of the most popular ones, including the Vanguard Dividend Appreciation ETF (VIG) and the iShares Core Dividend Growth ETF (DGRO), have expense ratios below 0.10%. When fees get as low as VIG’s 0.06%, you’ll keep approximately 98% of gains over 25 years compared to 87% for ETFs with a 0.50% expense ratio (assuming an 8% annual return).

Last month, the only ETF in these two categories with a positive return was the Global X S&P 500 Quality Dividend ETF (QDIV). Next was the Sound Equity Income ETF (SDEI), followed by the Freedom Day Dividend ETF (NYSEARCA:MBOX) and the JPMorgan U.S. Dividend ETF (JDIV). One thing these ETFs have in common is that they are relatively new, with hardly any assets under management. Assuming there aren’t concerns with the fund liquidating, these ETFs aren’t set up well for investors seeking a consistent and predictable income stream. Dividend payments may be significantly diluted if there is a rapid increase in ETF units created between the time an ETF collects dividends from its underlying holdings and the time it distributes to its shareholders. This is less likely to be an issue with more established ETFs; last month, one of the better-performing ones was the WisdomTree Total Dividend ETF (DTD), which lost 1.56% but has 508 million in assets under management.

You may be more likely to have heard of some of these next ten ETFs. I happen to like how the Invesco Dow Jones Industrial Average Dividend ETF (DJD) is set up right now. The iShares Core Dividend Growth ETF (DGRO) is an excellent low-fee option for those wanting market-like returns with a bit of a value tilt. DGRO has gained 92.61% over the last five years, putting it fourth-best on this list of 20 with that much history. The First Trust Rising Dividend Achievers ETF (RDVY) is second-best over the last five years and one I’ve often touted, but I’ve taken a more cautious view recently. It’s overconcentrated, has high fees, and is one of the more volatile funds you’ll come across in its category.

These last ten ETFs were the worst-performers in February and included the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). I used to write frequently about this selective group of stocks that have raised their dividends for at least 25 consecutive years, and for the most part, I’ve been critical. Long-term underperformance relative to the S&P 500 is primarily due to the near-zero exposure to Technology stocks since most weren’t increasing through the dot-com bubble era. However, in the last six months, NOBL has outperformed SPY by just 0.37%, even with the Invesco QQQ ETF (QQQ) dropping 8.50%. I’d expect more, but I frequently found the Dividend Aristocrats to be in relatively poor financial health. Many analysts will frame the dividend consistency screen as a huge plus, but I think it’s crippling the ETF. Five or ten years is sufficient, and investing is too much of a balancing act to limit yourself to slow growth, mature companies.

If you’re looking to diversify and capture the entire U.S. dividend market, consider adding some small- and mid-cap dividend ETFs to your portfolio. Earlier, I listed four Total Market Dividend ETFs (JDIV, DDIV, FVD, and TMDV) that sound like reasonable all-in-one solutions, but I strongly suggest avoiding this approach. Instead, allocate 80% of your portfolio to low-fee large-cap ETFs and supplement them with the higher-fee small-cap ones. Not only will you gain more flexibility, but you’ll probably come out ahead on fees, too. Simply put, don’t fall for the all-in-one solutions. It won’t be that much extra work to keep track of a couple more ETFs like the 12 I’ve listed below.

In the last five years, the VictoryShares US Small Cap High Dividend Low Volatility Weighted ETF (CSB) has easily been the best performer, gaining 73.31% and placing it in the middle-tier of the large-cap dividend category. However, it’s quite an achievement considering how the median five-year return for small-cap dividend and small-cap value categories was just 34.83% and 56.03%, respectively. It also has a 3.09% trailing dividend yield and an 8.87% five-year dividend growth rate with relatively low fees.

I want to point out that small- and mid-cap dividend ETFs are a great way to lower your portfolio’s volatility in a highly-risky space. It may not seem like it by looking at the five-year betas for most of the funds above, which average 1.13. However, consider that the five-year beta for the iShares S&P Small-Cap 600 Value ETF (IJS) is 1.36. Ironically, IJS has been more volatile than the iShares S&P Small-Cap 600 Growth ETF (IJT), which has a five-year beta of just 1.20. I would be cautious about chasing returns in the small-cap value space because although it will do a good job diversifying your portfolio, you could unwittingly be adding too much risk in a very uncertain market.

High Dividend Yield ETFs

In my view, the recent positive performance of high-dividend ETFs is why investors should look beyond historical returns. Consider that of the 63 dividend ETFs in this article, 49 launched after 2010. Using the Vanguard Value ETF (VTV) and the Vanguard Growth ETF (VUG) as proxies, why should anyone be surprised that dividend ETFs show up as long-term underperformers when VTV has trailed VUG by an annualized 3.64% over the last ten years? To dismiss dividend ETFs because they’ve lagged the S&P 500 Index is unwise and inherently assumes that the past will repeat and growth will continue to outperform value. We’ve learned in recent months how wrong that assumption can be.

Besides, there are other good reasons for owning dividend ETFs besides maximizing total returns. One example is the psychological benefit of seeing an income stream grow each year. It’s motivating, exciting, and keeps you invested in the market and less likely to panic sell. Having said that, you should pay close attention to your high-yield investments. Yield is inversely related to price, so it’s a form of deep-value investing that requires skill. I don’t think it’s appropriate for most investors to buy the highest-yielding products. Instead, limit the yield to what you need, not what you want. Otherwise, you’re likely taking on too much risk. Have a scan through the yield, growth, and performance metrics for the 20 high-dividend ETFs below, and I’ll offer my thoughts on the most popular ones afterward.

I’ve highlighted several of these high-dividend ETFs that have performed well in recent months. Examples include:

• The WisdomTree U.S. High Dividend Fund (DHS)
• The iShares Core High Dividend ETF (HDV)
• The iShares Select Dividend ETF (DVY)
• The Vanguard High Dividend Yield ETF (VYM)

These ETFs have low forward price-earnings ratios, while the best had solid protection from inflation that you won’t find in broad-based funds like SPY. For me, it was essential to see the declining revenue and earnings surprises in recent quarters and try to find ETFs that were cheaply valued but still had decent growth prospects.

Only one of these ETFs performed worse than SPY last month: the Nuveen ESG Dividend ETF (NUDV), which I’m guessing suffered due to its negligible exposure to Energy stocks. The Schwab U.S. Dividend Equity ETF (SCHD) wasn’t much better, though, losing 1.91% and falling near the bottom of the list for the second straight month. I’m limiting my expectations for SCHD in the near term due to its low 6.96% forward revenue growth rate, anticipating it will severely lag if growth stocks stage a comeback. I still think it’s the best all-around dividend ETF with a high yield, high dividend growth, and solid total returns, but I believe there are better choices now.

Income and Risk Management ETFs

I’ve decided to combine the income generation and risk management categories this month in recognition that there is a lot of overlap between the two, and I hope the yield statistics speak for themselves. Here are 26 ETFs I’ve found, the majority of which have a high yield, high fees, low assets under management, low beta, and little performance history.

As shown, the majority didn’t provide very much protection at all from last month’s downturn. There were some exceptions, like the Global X Russell 2000 Covered Call ETF (RYLD), but remember that small-cap value had a good month. Conversely, those tracking Nasdaq-1000 Indexes like QCLR, QYLG, and QRMI, found themselves in the bottom half of performers because QQQ lost 4.48%. Each option writing strategy is different, and it’s tempting to invest based on yield and historical performance. However, I urge readers to first look at the underlying assets on which options are written because that will still be the primary driver. Simply put, if you invest in a poor-quality or overvalued Index, don’t be surprised when your returns aren’t as good as you were hoping. The yield will offer some comfort, but not enough, and the high fees suggest they’re probably best for short-term, tactical use.

Risk, Concentration, and Turnover

Before investing in an ETF, it’s a good idea to know its risk and concentration levels, as well as how often the portfolio tends to change. Popular risk measures include beta (volatility to the overall market) and standard deviation (amount of variation in a set of returns). You can also look at drawdowns and the sector exposures to gauge how risky it may be. I measure concentration by the percent of assets in the top 10 or 20 and the number of holdings, and in my articles, I usually break a fund down to its top 20 industries to gain a deeper understanding. Finally, the portfolio turnover rate shows you how quickly holdings were bought and sold in the most recent fiscal year. Rules-based ETFs tend to have relatively high turnover rates, especially if they frequently reconstitute. Hence, their past risk and return metrics indicate how the strategy performed rather than how the current portfolio performed. If possible, gather information on the ETF’s current holdings because that’s what you’re buying or already own today.

I’ve summarized some basic fund information below, sorted in alphabetical order by ticker. I think these tables are most helpful if you know what type of investor you are: passive or active, risk-averse or risk-taking. ETFs with high turnover are similar to actively managed funds and thus, require more oversight to ensure your other investment objectives (yield, capital appreciation, dividend growth, volatility, etc.) are still met. In turn, ETFs with a low concentration of assets and many holdings are more likely to perform similar to the market-style they follow (value, blend, growth).

Target Outcome ETFs

There are two relatively new target outcome ETFs offered by Pacer ETFs worth looking into: TRPL and QDPL. I haven’t reviewed them myself, but a fellow contributor to the Hoya Capital Income Builder Marketplace Service (Retired Investor) initiated coverage on them in January after discussions with their creators. Essentially, the objective is to create distributions three or four times the yield of the S&P 500 in exchange for less upside. Have a read here, as it’s just one more tool in the toolbox available for high-yield investors.

10 Dividend ETFs To Watch This March

One of my goals this year is to create a ranking system for U.S. equity ETFs, and although I’m still in the early stages, I’d like to share with you five dividend ETFs that I feel have a decent shot at outperforming the market this month, and five that are showing signs of trouble. If you’re familiar with the fundamental analysis I usually do on ETFs, you’ll know I place great importance on fees, volatility, growth, valuation, and earnings reports to gauge market sentiment, and I’ve tried to summarize the most important ones in the table below.

The first five are those I think are set up well, while the next five concern me. These metrics are calculated on a weighted-average basis after accounting for outliers and not what the actual ETF’s quote page will show. Again, this is because ETFs are just portfolios of constantly-changing assets, and an ETF’s metrics reflect how the possibly outdated portfolio performed.

The prominent theme here is a low forward price-earnings ratio, around 15x for the ones I favor versus 20x for the ones I don’t. You’ll also notice more substantial dividend growth in the first five, better revenue and EPS growth, and attractive yields. Not to pile on the S&P 500 Dividend Aristocrats ETF too much, but 22.19x forward earnings is a high premium to pay for a similar level of growth. Sometimes, it just takes seeing what else is available to spark the idea that there are better ways to invest. NOBL’s success is likely in part due to how easy of an idea it is to market, but when you line up its fundamentals against the dozens of other dividend ETFs available, you begin to see the strategy’s faults.

Final Thoughts

Thank you all for your continued support. Each time I provide a monthly update, I gain a few extra followers and end up having some great interactions in the comments section or through direct messages. This series is constantly evolving, so please take the time to give your feedback below, and if you like the information I’ve provided today, I hope to see you back next month.