Under the Hood of SDOG | ETF Trends

The ALPS Sector Dividend Dogs ETF (SDOG) is a useful tool for achieving a diverse portfolio of large-cap U.S. stocks while also seeking to capture a meaningful dividend yield, generally maintaining a dividend yield much greater than that of the S&P 500, as well as exceeding many other dividend-focused ETFs.

SDOG tracks the S-Network Sector Dividend Dogs Index (SDOGX), which provides enhanced yield and diversified sector exposure. The index uses the S&P 500 as its starting universe and selects the five stocks in 10 sectors (real estate is excluded) with the highest dividend yield, according to Alerian’s associate director of research Roxanna Islam, CFA.  

These stocks are equally weighted within the index, resulting in an even 10% weighting to each of the index’s 10 sectors; that makes it very different from many dividend-focused products, which tend to have biases towards utilities and financials. This approach has mitigated the negative impact from the tech sector sell-off in early 2022, while providing an attractive dividend yield.

SDOGX’s equal weighting scheme reduces sector bias that can be found in broad-based U.S. equity indexes like the S&P 500, Islam wrote. Due to the S&P 500’s market-cap weighting scheme, it has been tilting increasingly tech-heavy throughout the years, while underweighting sectors like materials, utilities, and energy. 

Year-to-date through February 28, the S&P 500 had a total return of -8.0%, while SDOGX was able to achieve a total return of +1.3%, according to Islam; the technology sector as measured by the S&P 500 Information Technology Index (S5INFT) fell 11.4% during the same period. 

On the other hand, the energy sector, as measured by the S&P 500 Energy Index, returned 27.6% year-to-date. The S&P 500 has not been able to benefit from this sector’s performance given its current 3.7% weighting toward this sector versus 10.9% in SDOGX.

SDOG’s strategy is constructed to pick stocks that are the cheapest in their sector, with the assumption that prices will appreciate throughout the year and revert to the mean. 

At the end of each year, the companies with lower yields are removed and replaced with cheaper, higher yielding-stocks, which gives the index opportunity to again capture price improvement from discounted companies while taking advantage of high dividend income, according to ETF Database.

For investors looking for a market cap-weighted strategy, the Invesco Dow Jones Industrial Average Dividend ETF (DJD) is a low-cost option with an expense ratio of just seven basis points.

For more news, information, and strategy, visit the ETF Building Blocks Channel.