The explosion of dividend ETFs in recent years in a low-rate market for bonds has made it much easier for investors to buy diversified stock funds for yield. However, the wide array of ETF options can make it a bit difficult to choose the best fund to fit an investor’s particular needs and goals.
Different exchange traded funds take different approaches to covering a market segment. For instance, dividend funds may include high-yield stocks but they may take on greater risk as a result.
One dividend ETF that focuses on risk is the iShares High Dividend Equity Fund (NYSEArca: HDV), which includes a basket of high-quality, low-volatility stock picks. The fund is up 4.1% over the last three months and up 18.2% over the past year. HDV has a 0.40% expense ratio and a 3.56% 12-month yield. [Investors Still Want Dividend ETFs for Yield]
HDV isn’t among the largest five dividend ETFs but it still holds assets of more than $2 billion.
The fund is among a growing class of passive ETFs that follow “smart” or “intelligent” indices, which mimic actively managed methodologies.
The ETF tries to reflect the performance of the Morningstar Dividend Yield Focus Index, which includes 75 U.S. companies screened for dividends and have a Morningstar Economic Moat Rating that includes companies with a sustainable competitive advantage. It will not include real estate investment trusts or master limited partnerships.
Moreover, firms need to meet the Morningstar Uncertainty Rating, which excludes speculative and volatile stocks, and the Morningstar Distance to Default score, which ranks companies on balance sheet and liabilities. Eligible firms are then sorted by yield and the 75 highest yielding stocks are weighted by share of total dividends paid.