ETF Expert

Ten strangers meet on an island. Each has an ultra-shameful skeleton in his/her closet. One by one, people begin to die in mysterious ways.

This is the plot from Agatha Christie’s classic, And Then There Were None. It also bears a striking resemblance to the exchange-traded fund world’s fascination with dividends; that is, many of these dividend ETFs are destined for an untimely demise.

Domestic, Global, Europe, Asia, International, Small, Medium, Large-Cap, High-Yield, High Growth. And now, a Dividend Rotation Fund?

Don’t get me wrong… I love the additional cash flow that I get from the dividend portion of my investments. And I’ve been a huge supporter of WisdomTree’s dividend-based indexing.

Yet providers are using every trick in the drawer — scarves, top hats, cuff links — to garner attention for their dividend lineups. Sooner or later, the pretenders will be exposed and cast aside.

For example, there are at least 12 large-cap, U.S. dividend ETFs. Do we really need this many?

iShares Dow Jones Select Dividend Fund (DVY)
Powershares Dividend Achievers Trust (PFM)
Powershares High Growth Rate Dividend (PHJ)
State Street SPDR S&P Dividend (SDY)
First Trust Value Line Dividend Fund (FVD)
First Trust Morningstar Dividend Leaders (FDL)
WisdomTree Total Dividend Fund (DTD)
WisdomTree Top 100 Dividend Fund (DTN)
Vanguard Dividend Appreciation (VIG)
Powershares High Yield Dividend Achievers (PEY)
Vanguard High Yield Dividend (VYM)
WisdomTree High Yield Equity Dividend (DHS)

3 high-yield equity dividend ETFs… how different could they be? Vanguard High Yield (VYM) and WisdomTree High Yield (DHS) are virtually identical in their undesirability. Meanwhile, Powershares High Yield (PEY) is suffering from a 65% weighting in financial stocks. (And then there were 9.)

When I seek out a dividend-oriented ETF, I look for 3 features: (1) An adequate volume of shares trading hands, (2) Limited drawdown, where the ETF performs better than the broader market in a downtrend, and (3) A yield of 3% or more. (We want our dividend ETF to provide a bit of cash flow… don’t we?)

Vanguard Dividend Appreciation (VIG) serves up a paltry yield, and its average volume is less-than-impressive. Ditto for WisdomTree Total (DTD) and WisdomTree 100 (DTN).

The First Trust Value Line Dividend Fund (FVD) and The First Trust Morningstar Dividend Leaders Fund (FDL) both present attractive yields — 3.3% and 3.6% respectively. Yet  both have been struggling in 2007 sell-offs.

Powershares High Growth Rate Dividend (PHJ) struggles from low volume and a sub-2% yield. Its near carbon-copy, the Powershares Dividend Achievers Trust (PFM), fares even worse on the criteria that I mentioned above.

And then there were 2.

Not surprisingly, in fact, the remaining 2 dividend ETFs have been around for a long time. (They’ll probably still be here when the others close up shop!)

The iShares Dow Jones Select Dividend Fund (DVY) and the SPDR S&P Dividend (SDY) provide the stability, yield and volume necessary for success. The former generates a reliable 3.3% of income by holding 100 of the highest dividend-yielding securities in the Dow Jones U.S. Total Market Index. The latter also offers 3.3% annually and pays out quarterly, tracking the S&P Dividend Aristocrat Index.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.