Dividend exchange traded funds (ETFs) are a good fit in any portfolio. But an investor should know the sector weightings included in dividend ETFs, lest you get bitten when a highly weighted sector does poorly.
Investors interested in dividend ETFs should watch out for large sector distributions, most notably sector exposure in financials, comments Roger Nusbaum for TheStreet. Having a fund with a high exposure to financials is fine, but it might not be such a good thing if other funds in a portfolio also include high financial exposure. It also may be exposure that you, personally, don’t want in your portfolio.
Long-term investment in dividends has its perks. The stock market has seen an average annual return of around 10% in the long run, and 40% of that return has been generated by dividends.
Since the latest financials-induced migraine, dividend funds have decreased weightings in financials or even eliminated them altogether.
iShares Dow Jones Select Dividend Index (NYSEArca: DVY): up 2.9% year-to-date; decreased its weight in financials to 14% down from its original 40%. The reason for the reduction is because some financial companies have either suspended or cut their dividends. Now the largest allocation is in utilities, at 24%, followed by industrials, at 20%, and consumer goods, at 17%.
PowerShares Intl Dividend Achievers (NYSEArca: PID): up 33.2% year-to-date, has 30% in financials compared to its original 41%. It still has a high weighting in financials because the five large Canadian banks in the fund have held up in the crisis and none had to cut dividends.
WisdomTree Dividend ex-Financials (NYSEArca: DTN): up 13.7% year-to-date; as its name states, this fund has no exposure to financials; its weightings are in utilities, 17.5%; consumer staples, 13%; telecommunications, 11.3% and industrials, 11%.
For more information on dividends, visit our dividend category.
Max Chen contributed to this article.
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.