As more investors turn to divided-paying stocks and exchange traded funds in their search for yield, it is important to fully understand the dividend ETF investment, lest it provides some nasty surprises down the line.
For starters, ETFs with the “dividend” moniker don’t all provide the same exact exposure to dividend investing, Sue Thompson, Head of the Registered Investment Advisor Group and 401(k) Sales at iShares, wrote in a blog. For instance, the overlap between iShares’ five equity dividend ETFs ranges from 0% to 21%, depending on which two are compared. [The Risks and Rewards of Dividend ETFs]
One reason for similar overlaps between two funds is that they track a similar benchmark index. Different indices will hold varying stock components, which will also be mirrored by their respective ETFs. This variation is especially pronounced in domestic dividend ETFs compared to international dividend ETFs.
“Because dividend ETFs aren’t all cut from the same cloth, opting for more than one fund can potentially help you diversify your search for dividend income,” Thompson said. “That dividend ETFs aren’t all the same also shows just how important it is to do your due diligence before buying a fund, making sure you understand the index methodology and what you are going to own.”