Dividend ETFs 2.0

November 15th at 8:16am by Tom Lydon

As investors hunt for yield, exchange traded fund providers are churning out more dividend stock funds to satiate the growing demand, but some are skeptical that the new wave of dividend ETFs may not be up to par with the older generation.

Morningstar analyst Michael Rawson points out that dividend ETFs are “clearly the most popular equity style this year” as over 44 dividend ETFs, or 40% more than in 2010, gathered 13% of all net flows in stock ETFs so far this year, reports Murray Coleman for Dow Jones. [Dividend ETFs: What Obama Win Means for Tax Rates]

In the current low yield environment, with benchmark 10-year Treasuries hovering back around 1.6%, the search for income has led to a boom in what some advisors are referring to as “next generation” dividend ETFs that follow new customized benchmark indices. [Dividend ETFs Under the Microscope]

“Although they hold some promise over past versions, the newer dividend ETFs are increasingly moving into the realm of actively managed mutual funds with more sophisticated indexes and screening processes,” William Greiner, chief investment officer at Mariner Wealth Advisors, said in the article.

“We’re not advising our clients to jump into these new dividend ETFs until they’ve built up more of a track record,” Greiner added. “We’re fine sticking with older-generation funds.”

According to Morningstar data, older or “first generation” dividend ETFs have returned an average 11.6% in the 12-month period ended last week, whereas the next generation funds were up 7.7% over the same period. In comparison, the S&P 500 has gained 16.7%. [High Dividend Sectors, ETFs Are Not ‘in a Bubble’]

When looking at dividend ETFs, investors should make sure to still check under the hood as many of the funds have similar overlapping assets.

“We’re not sure many of these next-generation ETFs are really going to provide investors with meaningful long-term value,” Mill Creek Capital Advisors’ chief investment officer Tom Chapin said in the article. “You can only splice and dice the dividend market in so many ways before it starts getting rather redundant. You’ve got to look underneath the hood and weigh how much in incremental value you’re really getting from any niche ETF, particularly many of these newer dividend ETFs”

Some of the “old guard” dividend ETFs include:

  • iShares Dow Jones Select Dividend (NYSEArca: DVY)
  • Vanguard Dividend Appreciation ETF (VIG)
  • Vanguard High Dividend Yield (VYM)
  • WisdomTree Total Dividend (DTD)
  • SPDR S&P Dividend (SDY)
  • First Trust Value Line Dividend Index (FVD)

For more information on dividend funds, visit our dividend ETFs category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own DVY.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.