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.