There are times when I like what an exchange-traded fund asset is offering the investment public… at least in theory. Yet, over time, an ETF may fall short on things like tracking error, performance, methodological changes, liquidity and provider commitment.
In the case of ALPS Sector Dividend Dogs (SDOG), the relative newcomer’s theoretical construct appears sound. More importantly, the early indications are positive for SDOG — from “trade-ability” via the reasonable bid-ask spread to performance that compares favorably with Vanguard High Dividend Yield (VYM).
What is SDOG exactly? It is an ETF that endeavors to expand upon an exceptionally popular investment approach called, “Dogs of the Dow.” Whereas the original encourages investors to select a number of the highest yielding Dow components annually (at the start of the year), SDOG invests in the five highest yielding stocks in each of the S&P 500’s 10 sectors. It equal weights the 50 constituents, rebalances quarterly and reconstitutes annually.
In theory and in practice, SDOG is more diversified than other dividend funds. Vanguard High Dividend Yield (VYM) has roughly 20% in consumer staples and 13% in energy. iShares High Dividend Equity (HDV) has 25% in health care and 18% in utilities. In contrast, SDOG typically has 10% allocated to each and every sector, and approximately 2% in each of the 50 stocks.
At this moment in time, it appears SDOG will provide a greater income stream. Annualized, it may distribute in the neighborhood of 4%, whereas VYM and HDV are closer to 3%.
The annual expense ratio of 0.40% for SDOG is reasonable, as the cost of ownership is the same as HDV. However, Vanguard still reigns supreme in the world of lowest cost indexing -- VYM is a steal at 0.13%. Considering the likelihood that a buy-and-hold owner of SDOG could be forfeiting 0.27% on a compounding basis annually, an owner would need to determine that SDOG has significantly greater long-term potential.
SDOG has been a top dog among its competitors since its July 16 inception date. Then again, a three and a half month time trial isn’t much to go on.
(click image to enlarge)
Having grabbed $50 million in assets under management already, ALPS Sector Dividend Dogs (SDOG) might become a mainstay at the Dividend ETF table. I still prefer Vanguard High Dividend Yield (VYM) for the lower cost structure and ease of trade. That is, as an institutional money manager, I am able to enter and exit VYM with remarkable ease.
Discussed another way, an individual who chooses to buy and hold a dividend fund should consider SDOG. On the other hand, if you choose to stagger stop-limit loss orders to protect against extreme downside risk, you should stick with a battle-tested fund like VYM.
Click here for Gary's latest podcast.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.