Dividend exchange traded funds (ETFs) have fallen prey in some instances to the stresses of the market.
Owning a dividend-paying stock or ETF traditionally should pay off in times like these. After all, consistent dividend-payers are financially stable or they wouldn’t be able to sustain their payouts. Plus, by owning a high-yielding stock, you get paid while waiting the hard times out, says Elizabeth Ody for Kiplinger’s.
Over the past year, dividend ETFs have run into a few problems because of the enormous exposure to financial stocks, the sector that led us into this disaster. As a rule, many divdend paying stocks are financial, because they have the size, performance and capital to do so.
iShares Dow Jones Select Dividend Index (DVY) is a perfect example of how the payout strategy went wrong. The ETF tracks an index that invests in the stocks of the 100 highest-yielding U.S. companies that have maintained or boosted their dividends over the past five years-mainly financial stocks before 2008.
In 2006, 43% of weightings were in the financial sector; by 2008 49% was allocated to financials. DVY lost 44% over the 12 months ending March 18, trailing the S&P 500 by 5%.
Before going into any market, investors should do their homework and make sure that their funds don’t hold things they don’t want exposure to. Some investors might seek financials exposure, but others might not, and would be surprised by the financials weighting in DVY if they haven’t done their homework.
WisdomTree is remedying the financials exposure issue by restructuring some of their funds to leave the sector out entirely.
- WisdomTree Dividend Top 100 (DTN) will become WisdomTree Dividend ex-Financials
- WisdomTree International Dividend Top 100 Fund (DOO) will be re-named WisdomTree International Dividends ex-Financials Fund
DVY is down 24.2% year-to-date.
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.