With less than a month left in 2011, the best performers in sector exchange traded funds this year track industries known for dividends and some insulation from economic cycles. They include ETFs tracking utilities, pharmaceuticals and biotechnology, and consumer staples.
Utilities Select Sector SPDR Fund (NYSEArca: XLU) is up 14.2% year to date while the S&P 500 has gained 0.9%, according to Morningstar. The fund has a dividend yield of 4.2%.
Other ETF options for the sector include Vanguard Utility Sector ETF (NYSEArca: VPU) and iShares Dow Jones U.S. Utilities Index (NYSEArca: IDU). [Consumer Staples, Utilities ETFs Reward Defensive Investors]
Studies show that dividends make up a big percentage of total stock returns, and that buying companies with solid and stable dividends can make a difference in overall returns over time, reports Ryan C. Fuhrmann for Financial Edge. However, a good indication of dividend power is not always the higher dividend yield, but rather the quality of the company. [Sector ETF Performance in 2011]
The Wall Street Journal warns that investors need to factor in dividends when looking at total ETF returns. Price charts alone can be misleading, the newspaper said.
“Looking solely at prices, you’d be left believing small-capitalization stocks vastly outperformed more “sluggish” utilities. Data from FactSet Research Systems show that in the decade through Nov. 30, the iShares Russell 2000 Index exchange-traded fund, which tracks the shares of smaller companies, zipped up 61%, versus a more modest 29% gain for the Utilities Select Sector SPDR,” WSJ reported. “But that woefully misrepresents the returns of these two investments. When dividends are included, the utilities ETF returned 84% to investors over the same period versus 81% for the small-stock ETF. What’s more, over the period, the value of the Utilities Select Sector fund gyrated much less violently than that of the iShares Russell 2000.”