Dividend-focused exchange traded funds (ETFs) are experiencing a meltdown of their own.

These types of funds have large plays in high-yielding financial stocks and this is the sector that has been hit hard by the sell-off in banks exposed to the subprime meltdown and credit crunch, reports John Spence for MarketWatch.

The largest dividend-paying ETF is the iShares Dow Jones Select Dividend Index Fund (DVY), which has been one of the industry’s greatest success stories, enhanced by dividend tax breaks and low bond yields. DVY tracks an index of the 100 highest dividend-yielding securities listed in the United States.

The fund went down in late January along with the broader market, and hit a 52-week low of $50.85 on Jan. 22 – 33% off its high in May 2007.

These types of ETFs were first brought to the broad market as an alternative to traditional market exposure. What investors are now learning is that these funds have huge sector bets. There may be opportunity in buying low at this point.

Matthew Hougan, editor at Index Universe, points out the need for investors to look behind the funds, as dividend ETFs can be heavily weighted over just a couple sectors. It’s sound advice: always know what you own.

Tags: Financial, Sector ETFs