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.