Why Dividend ETFs Underperformed in 2012

December 28th at 9:29am by John Spence

Popular dividend ETFs lagged the S&P 500 this year after outperforming the index in 2011. The underperformance can be blamed on several factors, including a more risk-on market this year as well as the sector allocations of dividend ETFs.

That’s not to say that dividend ETFs didn’t turn in respectable performance in 2013. Most posted total returns of 10% or more. It’s just that investors would’ve been better off buying S&P 500 ETFs, which have gained about 15% year to date with only two trading sessions left in 2012.

However, the comparison to the S&P 500 may not be totally fair because some dividend ETF benchmarks take a somewhat quirky approach. For example, some ETFs weight by stocks’ dividend yields, rather than by market cap like the S&P 500. Therefore, many dividend ETFs invest in smaller companies relative to the S&P 500. [Dividend ETFs 2.0]

The sector allocations of U.S. dividend ETFs can also explain why they trailed the S&P 500 this year. For example, iShares Dow Jones Select Dividend Index (NYSEArca: DVY) has 30.8% of its portfolio in utilities, compared with 3.4% for SPDR S&P 500 (NYSEArca: SPY), according to investment researcher Morningstar.

The utilities sector weighed on the S&P 500 this year after a great 2011. Utilities Select Sector SPDR (NYSEArca: XLU) is up only 0.7% year to date. [Utilities ETFs Turn Negative on Tax Worries]

In general, dividend ETFs overweight the more defensive and stable areas of the market, so they might lag in strong rallies. They can also underweight cyclical sectors. DVY has 10.1% in the financial sector while the S&P 500 fund allocates 14.4%. Financial Select Sector SPDR (NYSEArca: XLF) trounced the S&P 500 with a 27.8% gain so far this year.

Performance of U.S. dividend ETFs in 2012

  • S&P 500: 15.3%
  • Vanguard Dividend Appreciation ETF (NYSEArca: VIG): 11.4%
  • Vanguard High Dividend Yield (NYSEArca: VYM): 12.3%
  • iShares Dow Jones Select Dividend Index (NYSEArca: DVY): 12%
  • iShares High Dividend Equity Fund (NYSEArca: HDV): 9.6%
  • SPDR S&P Dividend ETF (NYSEArca: SDY): 11.1%
  • Schwab U.S. Dividend Equity ETF (SCHD): 11.2%
  • WisdomTree LargeCap Dividend Fund (NYSEArca: DLN): 11.9%
  • PowerShares Dividend Achievers Portfolio (NYSEArca: PFM): 9.5%
  • First Trust Value Line Dividend Index (NYSEArca: FVD): 10.7%

Morningstar year-to-date data as of Dec. 27.

Full disclosure: Tom Lydon’s clients own DVY and SPY.

The opinions and forecasts expressed herein are solely those of John Spence, 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.

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