Jeremy Schwartz on How to Choose a Dividend ETF
- Joshua M Brown
- August 23rd, 2012
So, of course, WisdomTree's guy is going to be biased here, but I thought Jeremy's take on how to choose the right dividend ETF was illuminating as the field gets more and more crowded. The WisdomTree approach to their main US dividend ETF is to take a passive stake in the whole universe (1300 payers). There are all kinds of other screens that can be thrown on top of it (iShares has their version, so does SPDR etc), so it's important to decide what's best for you.
Here's what he told Index Universe today:
Murphy: How is a retail investor to go about picking the right dividend ETF with so many to choose from?
Schwartz: It goes to back to under-the-hood analysis. When you look at a fund like WisdomTree’s LargeCap Dividend ETF (NYSEArca: DLN) of 300 dividend stocks, you see a broad take on the large-cap dividend market. This is like the S&P 500 of dividend stocks. It makes sense to hold DLN as a core portfolio holding and add more active strategies or more active index strategies around it to find the highest-yielding stocks or the 100-best dividend growth stocks, what have you. But you have to know what you are getting.
If you look at Vanguard’s VIG, for instance, it might surprise you to see that the fund represents less than 20 percent of the large-cap market today, because of the screens that Vanguard uses in the strategy. Vanguard, which is a true indexing powerhouse, is in a way more like an active manager in VIG. Apple, for instance, reinitiated dividends this year and will be the third-biggest dividend payer in the U.S., but it is not included in VIG and will not be included for a long time, because VIG requires a stock to have increased dividends for at least 10 consecutive years before inclusion, among other criteria. Same thing with Cisco Systems—they just increased their dividend 75 percent. So you get a partial representation of the overall market. You need to know what you are getting.
This is a really important point, it highlights the fact that with screening comes skewing.
For an example, I own a US dividend ETF (not WisdomTree's in this case) for clients that is a bit more active, stocks have to have been paying for 20 years just to make the first cut. Now you look at an Intel, which pays a great dividend, they have to go another 12 years or so to even make it into my fund. It is what it is, there are always pros and cons to these things.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.