Morningstar's New High-Dividend ETF: Mr. Kettle, Meet Mr. Pot (ETFs: FDL, DVY, PEY, SDY)

Roger Nusbaum submits: I was amused to see that Morningstar has licensed a dividend index that First Trust will list as an ETF this week (ticker: FDL).

Morningstar often criticizes ETFs for have too much concentration in the top ten. This new fund, according to this article, based on their index, has 62% in the top ten. Oops. [I've since confirmed the 62% figure with Morningstar.]

The article also quotes Morningstar talking about differentiation. OK, well here are the tickers, again according to the article, for the top five holdings: C, BAC, MO, VZ and JPM. Let's compare to other equity income ETFs:

The top five of DVY include MO, BAC, PNC, DTE, and PNW. The top ten account for 25.86%

The top five for PEY are MRK, WM, T, Progress Energy and Fnb corp. The top ten account for 26.28% of the fund.

The top five for SDY are CAG, ED, Vectren, First Horizon Natl and MO. The top ten account for 28.23% of the fund.

After doing that study I did not change the comment above about differentiation, but maybe I should have because the names are reasonably different.

If correct, I think the the new Morningstar ETF might correlate very closely to the two mega-cap ETFs; the iShares S+P 100 (OEF) and the Rydex Russell Top 50 (XLG), but it's too early to tell.

Comments

[Internet2k4:]

Without counting holdings, wouldn't you throw DIA yielding 2.22% in there, with the lowest MER and largest trading volume, 10 times that of DVY the next largest, with some of these being extremely thinly traded? Current 1 year performance difference between DIA and the others is negligible, with the best market gainer XLG outperforming by 2% but only yielding 0.51% and the worst market gainer PEY underperforming by about 2% and yielding .5% better. (I net the MERs out of my yield calculations.) Longer term they all seem to move in lock step. Setting aside the new product discussed here, to me the present choice is between DIA and DVY, which photofinish on market performance, .5% yield advantage to DVY. .2% MER and overwhelming market liquidity advantage to DIA ("No Waiting!")

2006 Mar 14 09:06 AM

[Roger Nusbaum:]

Thanks for the comments.

That I did not even think of DIA when I was writing the article speaks to how useless I think the index is and any product derrived from it.

I haven't studied SDY yet but a couple of people have made similar comments.

2006 Mar 16 08:20 AM

[Michael Zhuang:]

There are many better offerings than this MorningStar "index", see the complete list of high dividend yield ETFs below. Personally, I prefer the broader based WisdomTree ETFs.

investmentscientist.co.../

2008 Oct 23 11:03 AM