ETFs with narrow focus can pay dividends
Most advisors would agree that the safest and best investing strategy is broad investment diversification. Yet there are times when a portfolio can benefit from a tactical allocation to specific industries, sectors or market approaches.
For investors interested in dividend stocks, three ETFs that take a narrow approach might be worth considering in selected circumstances. One of the funds is from First Trust and two are from Guggenheim.
First Trust Nasdaq Technology Dividend Index Fund (TDIV, expense ratio: 0.50%), launched in August 2012, follows an index of dividend-paying tech and telecom stocks.
The 95 holdings in the portfolio must have paid a dividend over the past 12 months, with no decreases over that period, and have a yield of at least 0.5%. Technology stocks have an 80% weighting in the fund; telecom issues 20%.
The portfolio uses a modified dividend-value weighting methodology with caps to prevent excessive concentration. The trailing 12-month yield is 2.15%. As of Nov. 8, the year-to-date total return is 19.87%. Returns for the one-, three- and five-year periods are 24.67%, 11.48%, and 15.98%, respectively.
Because the ETF excludes non-payers, such as Alphabet (Google) and Facebook, it tends to underperform the broader tech sector. Even so, this could be a useful tech enhancement for a conservative investor’s portfolio.
Guggenheim Dow Jones Industrial Average Dividend ETF (DJD, 0.30%) holds the familiar 30 stocks of the oldest market measure, Dow Jones Industrial Average (DJIA). But where the DJIA weights its holdings by price, DJD weights by yield. In effect, the portfolio is a modification of the Dogs of the Dow tactic of investing in the 10 highest yielding Dow stocks.
The fund, which debuted in December 2015, is non-diversified since several of its positions are more than 5% of the portfolio. In the traditional Dow, the three stocks with the largest weighting are Boeing, Goldman Sachs, and 3M; in DJD, the top spots are held by Verizon, IBM, and Exxon Mobil. DJD returned 24.42% in the 12 month-period ended Nov. 8. And for 2017 year-to-date, the return was 15.99%.
The ETF’s 12-month trailing yield is 2.62% vs. the 2% seen in the SPDR Dow Jones Industrial Average ETF (DIA, 0.17%). More significant is that the SPDR ETF, tracking the unmodified Dow, posted stronger returns in both the full year (32.04%) and 2017 through Nov. 8 (21.42%).
Since DJD follows the same 30 stocks as the traditional Dow, buyers of this ETF would have to have a very strong belief that the “Dogs” tactic would start to work in the coming months.
Guggenheim Shipping ETF (SEA, 0.65%), launched in June 2010, seeks to replicate the little-known Dow Jones Global Shipping Index. The fund concentrates on common stocks, ADRs, and master limited partnerships of companies engaged in the transport of goods and materials.
SEA holds only 26 positions and its top holding, A.P. Møller-Mærsk A/S, accounts for more than 17% of the portfolio. The ETF has a trailing yield of 3.94%. Although stocks are ranked by trailing yield to determine the makeup of the index, weighting is by market cap.
Individual company weights are capped at 20% and no more than 45% off the index can be composed of companies with a weighting of 4.5% or more. SEA’s total return has been negative over the three (-9.96%) and five (-0.32%) year periods ended November 8, but it has posted positive returns for the year (14.74%) and YTD (6.34%).
Many of the companies in SEA’s portfolio have major interests in energy transportation, so the recent strength in oil prices may account for improved performance.
Consequently, advisors can view this portfolio as a tactical position to benefit from higher oil prices while collecting an attractive yield.