ETF Expert

Not all investors flock to "get-rich-quick" symbols. (Though it is hard to look away from the meteoric rise in AAPL shares).

Indeed, many seek less volatility and more income through dividend-producing stocks. Utility companies like Con Edison (ED) prove popular, as do staples like Coca-Cola (KO).

It should come as no surprise, then, that the exchange-traded fund world has plenty of dividend baskets. The iShares Dow Jones Select Dividend Index (DVY) has been around the longest, currently serving up 3.25% annually.

What may come as a surprise to some, however, is the disappointing returns that domestic dividend ETFs have had in 2007.  The iShares Dow Jones Select Dividend Index (DVY) has 0% capital appreciation year-to-date, with only a few cash payouts to ease the pain. On the flip side, the Wisdom Tree International Large Cap Fund (DOL) has doled out an infinitely more impressive 20% so far, not accounting for its upcoming distribution.

Blame the subprime mess in the U.S. banking system for DVY’s woes. After all, financial stocks account for roughly 33% of the Dow Jones Dividend Index’s holdings.

Before going gaga for international dividends, however, one might consider the extent to which international banks have yet to disclose (or not disclose) exposure to mortgage-backed losses. Today, for instance, UBS announced a $10 billion write-down, enough to wipe out a year’s worth of profit for the "foreign" institution.

It follows that if foreign financials were to be "hiding skeletons," you might see international dividend ETFs get walloped. Financials make up roughly 1/3 of the weighting in the Wisdom Tree International Large Cap Fund (DOL). Financials also make up 1/3 weighting in the brand new First Trust Global Select Dividend Fund (FGD).

I don’t believe First Trust charts any new territory with its new dividend ETF, although FGD does have a higher allocation to utilities (15%). It also has a rather sizable allocation to the United Kingdom where… truth be known… a housing downturn also appears inevitable.

If you are going to wade in, you’ll need to come to terms with the 1/3 exposure to foreign financial institutions. This is true for nearly all international dividend ETFs. And if you are going to wade in, I believe you’d be better served by "already proven" Wisdom Tree International Large Cap (DOL).

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 Advisor 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.