There are about 50 different dividend-focused ETFs trading that use company payouts as a screening process. Some experts say the dividend sector is blowing up and competition couldn’t be fiercer.
“Investors have poured more than $69 billion into these products, with much of that asset base coming in the past three years, a function no doubt related to growing concern that bond investors are quite likely to face capital losses as the extraordinary period of easy money and low rates morphs into a new era of inflation,” Paul Baiocchi wrote for Forbes. [A New High Dividend, Low-Volatility ETF]
ETF issuers are neck-and-neck trying to compete for dividend market share, competing for assets in one of the trendiest corners of the market. The latest product from Global X adds a low-volatility twist to a dividend strategy in the Global X SuperDividend US ETF (NYSEArca: DIV). Meanwhile, WisdomTree has filed to launch more dividend ETFs – one focused on small-caps, the other on the broad market, reports Baiocchi for Forbes. The WisdomTree U.S. Dividend Growth Fund and the WisdomTree U.S. Small Cap Dividend Growth Fund attempt to target sustainable dividend streams as opposed to firms with temporarily high dividend yields. [Preferred Stock ETFs: An Alternative Source of Yield]
Critics are raising an eyebrow that there is some one-upping going on in the sector. There appears to be a “me-too” trend beginning, something we’ve seen before in ETFs. For example, the WisdomTree ETFs are being compared to the popular funds already trading – Vanguard’s Dividend Appreciation ETF (NYSEArca: VIG), the SPDR S&P Dividend ETF (NYSEArca: SDY) and the iShares Dow Jones Select Dividend (NYSEArca: DVY). These funds yield 2.67%, 2.20% and 4.11%, respectively. [Dividend ETFs Remain in Favor as Stocks Hit Record Highs]
Investors need to realize that companies do not pay dividends daily and the time between the company paying the dividend and when the ETF manager distributes the dividend varies. During this time, the assets under management usually grow and so does the investor base. The yield realized gets spread out, and is usually less than expected from the underlying portfolio. [An ETF That Tracks Constant Dividend Payers]
The opposite of this is also true, where an ETF may show large outflows, causing the dividend yield to rise higher than the stated yield in the prospectus.
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own DVY.