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FlexShares ETFs from Northern Trust Dominate Last Year's Performance

This year's look back for the top performing dividend ETFs delineates between domestic U.S. equity dividend ETFs and a separate short list for top performing international and/or foreign non U.S. centric dividend ETFs. Some new upstarts from the venerable asset manager Northern Trusts' FlexShares (NTRS) have made a big splash with solid performance of not just one - but all three of their U.S. equity dividend ETFs; making the top five for performance for 2013 domestic dividend ETFs.

It's always curious to me how at times the smaller "quiet" funds often outperform the bigger "popular kids" in the ETF landscape. These three FlexShares products, which commenced trading in December 2012, have provided some outsized performance (so far). No doubt these were marketed initially from their internal advisor channels but with solid performance will likely garner more investing attention from all investors. The indexes these funds use are internal to Northern Trust - and there appears to be sparse literature available as to the funds' indexes "secret sauce" methodology. What is published from FlexShares Northern Trust, is that these funds use proprietary "quality "scoring metrics including factors which target yield, beta, etc. from several Northern Trust indexes. More info here.

The Top 10 Performing U.S. Equity Dividend ETFs:

Ticker Symbol

ETF Name

AUM (Millions)

2013 Total Return %

1

(QDYN)

FlexShares Quality Dividend Dynamic Index Fund

19.91

37.4

2

(DES)

WisdomTree Trust WisdomTree SmallCap Dividend Fund

1043

36.7

3

(QDF)

FlexShares Quality Dividend Index Fund

340

36.3

4

(SDOG)

ALPS Sector Dividend Dogs ETF

497

34.2

5

(QDEF)

FlexShares Quality Dividend Defensive Index Fund

51.3

33.5

6

(DON)

WisdomTree MidCap Dividend Fund

913

33.3

7

(SCHD)

Schwab US Dividend Equity ETF

1531

32.9

8

(TDIV)

First Trust NASDAQ Technology Dividend Index Fund

282

30.9

9

(PEY)

PowerShares High Yield Equity Dividend Achievers Portfolio

364

30.5

10(tie)

(SDY)

SPDR S&P Dividend ETF

12508

30.1

10(tie)

(VYM)

Vanguard High Dividend Yield ETF

7275

30.1

Top 5 Performing International Dividend ETFs:

Ticker Symbol

ETF Name

AUM (Millions)

2013 Total Return %

1

(DFE)

WisdomTree Europe SmallCap Dividend Fund

642

45.3

2

(DLS)

WisdomTree International SmallCap Dividend Fund

840

26.3

3

(DWM)

WisdomTree DEFA Fund

557

21.6

4

(DOL)

WisdomTree International LargeCap Dividend Fund

293

19.9

5

(DFJ)

WisdomTree Japan SmallCap Dividend Fund

283

19.5

Notice that some of the large popular funds also had some nice performances, including the now large offering from Schwab, SCHD. Tied for tenth the popular tandem of SPDR's SDY and Vanguard's VYM. Another notable fund was the First Trust NASDAQ Technology dividend fund, TDIV. Investors typically don't think of the technology sector for dividends, but some of the holdings such as IBM CISCO Systems (CSCO) and chip giant Intel (INTC) are actually quite mature and well past their growth stage These companies now offer their shareholders some real yield and/or buybacks. Looking abroad as Europe continues to recover, the scorching performance of WisdomTree's DFE and other small caps dominated the gains (DFJ and DLS).

Considerations and Looking Ahead for 2014:

Most of these funds in the U.S. equity dividend list have many of the same top holdings and have a very high correlation to each other. The differences will be in the minute details of sector and individual weightings.

Going forward, an investor or adviser must make a judgment call as to the ETFs with the most favorable sector weightings for this point in the economic and market cycle. They have to be mindful of various scenarios including the backdrop of U.S. growth prospects and the likelihood of higher interest rates going forward.

  • Investors who don't want to play the sector handicap games, could just consider SDOG, the ALPS Sector Dividend Dogs. This fund equal weights sectors and holdings of the highest dividend yielding stocks in the S&P 500. Highest dividend yield will also by design have some contrarian characteristics.
  • Is this the beginning of a secular bull market? Will dividend growth be the most suitable methodology going forward within this back drop? Rising rates generally rewards higher growth companies as equity investors risk models demand more than a fixed income coupon. Rising dividends is generally a sign of robust future growth. Investors that share this view could consider such funds as VIG, the Vanguard Dividend Appreciation ETF or DGRW,the WisdomTree U.S. Dividend Growth fund.
  • Correction coming? Will the safety of utilities and staples temper an angry correction or bear market? Bearish or cautious investors will by nature tread lightly and depending on the catalyst for a correction - will have to be very careful. If catalyst is sudden rising rates due to a bond market hiccup or misstep from Janet Yellen, then conservative dividend ETFs that stress relative "safety". HDV, the iShares High Dividend Equity Fund, with over 12% in utilities may do very poorly. Conversely, if the correction is due to U.S. economic growth concerns, then this ETF may somewhat outperform with those conservative over weightings in utilities, health care at 18%, and staples at over 26%.
  • Will the financials carry the heavy load? Financials could dominate performance because of the alluring upcoming spreads for the yield curve. An orderly and slow rising rate environment will ultimately mean nice earnings for the financial sector, as those companies can "borrow cheap and lend dear." In fact a strong financial sector will be healthy for the entire U.S. growth story going forward. Some dividend ETF ideas with heavy weightings in financials and other cyclicals include SDY, the SPDR S&P Dividend ETF, with financials at over 16% and industrials at almost 13%. Other ideas include (DLN), the WisdomTree LargeCap Dividend Fund that has financials at 13.7%, and information technology at 15.9%. Another idea with heavy weighting in financials at 17,7% is (DTD), the WisdomTree Total Dividend Fund.

Summary:

We now enter a new FED regime with Janet Yellen at the reigns having the task of slowly and surgically cutting off the monetary punch bowl. This will likely prove to be a very tricky period. Investors should read ETF fact-sheets, prospectuses, and other literature such as the funds' index methodologies if available.

Source: 2013's Top Performing Dividend ETFs And Ideas For 2014