Should You Invest In High Yield Dividend ETF’s?
Don’t Listen To Me, But Please, Hear Me Out: # 32
Shaheeda Abdul Kader, Mar 3 2021
High Dividend ETF’s
ETF’s or Exchange Traded Funds are a cross between Mutual Funds and Stocks. They usually track an underlying index, for example the S&P500 Index or the Emerging Market Index, or Biotech Index etc. An ETF will have many stocks in their portfolio thus providing some diversification like mutual funds. But ETF’s are traded like stocks. My earlier blog on ETF’s and Mutual Funds, “WHY INDEX FUNDS ARE GOOD FOR NEW INVESTORS”, may give you a good overview.
A friend who is a far better investor than I am suggested an article, “136 Dividend ETFs Ranked For 2021”. I was intrigued and went down a rabbit hole researching these ETF’s. I started to wonder if indeed I’ve been missing out on a great class of ETF’s.
Dividend Yield ETF’s
A Dividend ETF will contain a set of dividend distributing stocks. This, the entire ETF will also provide dividends. So long as the price of the stocks also rise on average, the ETF’s value will also increase.
It could be an excellent strategy to invest in high yield dividend ETF’s. If you need income to offset your expenses, it would be great to get it from dividends. Since ETF’s are entirely made of securities, they carry risks related to the underlying stocks. If the value of the underlying stocks fall, then you risk losing capital as well as a decline in yield.
I did a quick analysis on the top 20 ETF’s listed in the The Street’s article mentioned above. As always I compared their performance to my favorite ETF, $SPY, S&P500 Index ETF.
- 12 out of 20 of the ETF’s performed much better than $SPY when comparing YTD performance. In fact, 4 of them had double digit growth of 10.20% or more. SPY grew 3.39% in the same period which is obviously nothing to get excited about.
- However, when we compare performance over a longer periods, $SPY beats most of the ETF’s all of the time.
- In the last 1 year, $SPY returned 25.06% and only 2 others beat $SPY. Victory Portfolios II – VictoryShares US EQ Income Enhanced Volatility Wtd ETF (CDC) at 32.52% and Schwab Strategic Trust – Schwab U.S. Dividend Equity ETF (SCHD), 27.95% did better than $SPY.
- Over a longer investment horizon of 3 to 5 years, $SPY produced higher returns than the 20 ETFs. In the table below look at Compounded Annual Growth Rate or CAGR for 3, 5, and 10 years.
See table below for details. You can scroll up and down as well as left and right. Data is as on March 3, 2021.
So We Buy $SPY Always?
Past performance is no guarantee for the future. However, if you are interested in a more or less stress-free investment for the long term, $SPY is a good choice. Nonetheless, we may find opportunities if we dig a little deeper and analyze further. It is possible that some of the 20 ETF’s may produce higher gains than $SPY in 2021 or beyond. We can for example, decide to invest based on the momentum trends for some short term gains.
Here are a few more metrics you can consider:
- Please look at the average volume of trades as well. It is best to invest in stocks or funds that have large trading volumes to ease liquidity. In other words, if you need to sell your shares, you should be able to quickly find a buyer. You may not be able to sell quickly or find the right price if the average volumes traded are low.
- Look at the Net Expense Ratio or the fees the fund charges you every year. For example, $SPY has an expense ratio of 0.095% whereas CDC will net you 0.37% in expense fees.
- Carefully review what stocks are the ETF holding and what is the weight of each within the ETF. Suppose an ETF has 50 stocks in the portfolio and 3 stocks make up 25% of the portfolio. This portfolio may not be well diversified as a sharp drop in any of those top 3 stocks will have a significant impact on the ETF as a whole.
Cool Tools For Quick Analysis
If you would like to do your own analysis, may I suggest KoyFin or FinViz? They both have free versions for quick analysis. You can compare stocks, ETFs, Mutual funds etc. I found KoyFin a little easier to use but both are good. FinViz lets you export to excel easily but KoyFin does not have that feature. You can create your own portfolios and track them daily, so that’s a nice feature. You can create watchlists and play around with a dream portfolio. Once you feel confident you can buy the real thing from your brokerage account.
- If you are investing for the long term and you don’t have time to do a lot of research, then buy a market wide index fund. Any of these should be good:
- S&P500 Index Fund, like $SPY
- Vanguard 500 Index Fund ETF $VOO
- Schwab® S&P 500 Index Fund $SWPPX etc.,
- You could also add these will get you exposure to the world stock market and help further diversify your portfolio:
- $VSS, Vanguard FTSE All-World ex-U.S. Small-Cap ETF
- iShares MSCI ACWI ETF $ACWI
- Vanguard FTSE All-World ex-U.S. ETF $VEU etc.
- If you are after aggressive growth and don’t mind the high risk, then you can consider some of these. I will review these ETF’s in my next blog.
- Invesco QQQ Trust Series 1 $QQQ
- Direxion Moonshot Innovators ETF $MOON
- ARK Innovation ETF $ARKK
- ARK Genomic Revolution ETF $ARKG, etc.
Check the Resource Page to find all the articles and tools I used to prepare this blog.
I usually blog about investing in the stock market. If you would like help on how to budget, save or invest more, please feel free to reach me, on Twitter @saq3 or LinkedIn @Shaheeda Abdul Kader, or leave a message at firstname.lastname@example.org. I’d be happy to offer you my services. Please do check my other blogs here.
I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself . I hope you will be empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me, and I’ll do my best to help you with your queries.