Conventional wisdom would tell you that funds and ETFs would be safer and less volatile than owning individual stocks, and there is certainly some truth in that statement. However, in my personal portfolio in 2008, my income EFTs and funds have been more volatile and produced lower returns. Through March 24th, my income stocks total YTD return is a loss of (-0.6%) versus a loss of (-1.9%) for my income ETFs/funds.
It is no surprise that my Vanguard Financials ETF (VFH) is the biggest loser. VFH has a YTD total return loss of (-4.8%). I was more surprised by the performance of SPDR S&P Dividend ETF (SDY). Going into the weekend it was my second biggest loser, but has recovered some on Monday. Once I checked its sector breakdown on Morningstar, I understood what was driving it down. SDY is 35.54% weighted in financials.
In a recent MarketWatch article, "Dividend ETFs yield to pain in financials stocks", Matthew Hougan, editor at IndexUniverse.com, said it's important for investors to study the differences in the dividend ETFs' approaches before committing money. He went on to say:
"These dividend ETFs were to an extent presented as alternatives to traditional market exposure," he said. "They were put out there as a mainstream way to go after the whole market, but the poor returns recently have showed what you could have found out with a little digging -- these ETFs can have significant sector bets."He noted that iShares Dow Jones Select Dividend has almost 70% of assets concentrated in just two sectors: financials and utilities."Investors have to be aware of the sector allocations," Hougan said. "Maybe this is a wakeup call that these dividend ETFs shouldn't be considered mainstream funds."
Like all my investments, ETFs are periodically reviewed to determine their performance versus my benchmark. As mentioned in an earlier post, I am in the midst of a comprehensive project to calculate my asset allocation across all my investments. This project should be complete in early to mid-April and I will post the results here when available.
Related Articles:
I personally like the strategy of using ETF's to build dividend income while reducing risk.
I find tha tit works especially well in smaller portfolios.
I currently own DVY and ADRD in a sheltered account.
Exactly the same thing has happened here in England since around August last year. The (sole) high dividend paying ETF fell much faster than the broader market ETF, due to the plunge in financials and also housebuilders, who make up a reasonable proportion of the market in these small isles.
Probably a good buying opportunity, though I note a US analyst (Whitney?) is forecasting US banks are going to slash earnings, which may of course mean dividend ETFs in the US are falling for a reason (because the dividends may follow).
best of luck!
Tyler: I think ETFs and closed -end funds will work. I am still tweaking my implementation. I will have to take a look at ADRD, it is not one I have previously considered.
Monevator: I don't think the carnage in the financial sector is over yet. I suspect it will go lower before significant gains are recorded.
Best Wishes,
D4L