In this week’s coverage of dividend ETFs (Looking For The Top Dividend ETF and Top Dividend ETFs: Round 2) I considered three funds to be at the top of the class: The First Trust ValueLine Dividend (FVD), iShares Select Dividend ETF (DVY) and PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD). I was going to sum up my primary conclusions from those reviews and put the subject to rest, but so many readers expressed interest in the ALPS Sector Dividend Dogs ETF (NYSEARCA:SDOG) that I thought I’d take a detour for a quick look at it first. This way when I got around to summarizing my candidates for top dividend ETF I would not feel like I was leaving something out. So in this article I’ll compare SDOG to the three ETFs I’m favoring. I’ll be repeating some of the information I used in the two earlier articles so you won’t have to flip back and forth to keep up.
SDOG’s approach is simple: It’s the classic dogs strategy of picking high yielders. It selects the five highest yielders from each of the S&P 500's ten sectors to build a 50 position portfolio. Those high yielders often have attained that status by lagging their peers on price growth; thus, they’re the dogs of their categories. The fund is rebalanced annually the last Friday in December.
This is basically the simplest of algorithms, coupled with the simplest of trading activities. Yet ALPS charges a 0.40% expense fee. Regular readers know my views on fees, but somehow 0.40% seems a little pricey for a management strategy that a twelve-year old with a pencil and a list sorted on S&P 500 sectors and yield can do in an afternoon. And the twelve-year-olds I know wouldn’t even need help sorting the list. I'll leave it to SDOG's fans to explain what it is that justifies the 0.40% they're paying. Only two of the ten funds I've been reviewing have higher fees: FVD and FDL.
I'm told the fund is commission free to Charles Schwab clients, which is a point in its favor for those with small positions who make regular additions to the fund or for frequent traders.
The 50 position portfolio is now five months from its December 2016 rebalance. It started equally weighted. Now, at the end of May, its sector breakdown looks like this:
Obviously, those telecom dogs have been doing their best to live up to their name, while utilities, industrials and consumer staples have been doing well this year.
For comparison, here’s the sector exposures for my top three funds discussed previously:
Of course the key question is how well does it perform.
Dividend yield is respectable at 3.33%, a half point below SPHD but well above FVD’s 2%. For the complete set of ten funds, SDOG's yield ranks second.
Full performance stats since the first month's data from the inception date of SPHD, the youngest fund here, looks like this (from portfolio visualizer):
SDOG's CAGR beats DVY, effectively ties with FYD and lags SPHD. The fund also beat the S&P 500 index fund from Vanguard which speaks to the effectiveness of the dividend dogs strategy as the fund is selecting its choices entirely from that index fund’s pool. It may be only a couple of hundred bucks on $10K over four and a half years, but a beat is a beat.
The less appealing stats are the indicators of volatility. Standard deviation for SDOG is the highest in the list. Its worst year was worse than that of the other funds by a large margin. And there is a cautionary tale in that maximum drawdown number. We see this summed up in SDOG's Sharpe and Sortino ratios which fall below the other dividend ETFs, and even below the broad market which is not what I'd expect from a portfolio of dividend stock from quality companies. We know they are dividend stocks, so the second descriptor becomes questionable in my mind.
For my purposes, this borders on a fatal flaw. As I noted in my first article in this series, I’m interested in these dividend ETFs to take advantage of the well documented outperformance of stocks from quality companies that pay modest dividends. This correlates with at least three premia factors: Value, Low Volatility and Quality so it has the potential to be a robust filter for outperformance. SDOG’s approach may hit the value factor, but it falls well short on low volatility. Quality is an open question, but my gut tells me that selecting for losers is probably not going to pull out companies that rank at the high end of the quality scale.
Here’s a look at those drawdowns for DVY, SDOG, FVD and the index from SDOG’s Aug 2012 inception:
The big drawdowns that began in May 2015 was deepest for SDOG. That is true of most of the other smaller drawdowns as well. For most down cycles, the fund gave up more than the full S&P 500. The flip side of that extreme drop is that SDO had a somewhat quicker recovery. Its longest drawdown period for since Aug 2012 was for five months and the fund had fully recovered in eleven months. For DVY it was seven months and thirteen months to full recovery. FVD also took seven months for the drawdown to turn around, but had fully recovered in eight. The S&P index fund’s longest month to month negative streak was only two months and took ten months to fully recover the previous high.
So what I see in SDOG is a fund with a decent, but far from category-beating, yield. A fund with solid growth since its inception sufficient to have topped the S&P 500 pool it draws from, but one that lags SPHD and FVD. The return differences between SDOG and SPHD or FVD are not large enough to really make a difference, so to choose among them you’d start to look elsewhere. Volatility is the likely next stop. Here is where SDOG doesn’t measure up. Its high standard deviation, deep drawdowns and low risk-return ratios push the choice solidly to SPHD and FVD from my point of view.
Although I’ve taken the set of low-fee funds out of consideration, I will add that SDOG does well against them. Let's compare it with two strong funds from the low-fee list, the Schwab US Dividend Equity ETF (SCHD) and Vanguard High Dividend Yield ETF (VYM). The time scale is from the time of SDOG’s inception. The volatility measures remain problematic but the stronger return numbers may be sufficient to justify looking past the volatility.
I’d be willing to pay the extra expense costs (0.40%) to own SDOG over the bargain-priced SCHD (0.07%) or VYM (0.08%) if those were my only choices. But they’re not, so I’ll pass on all three. I don't think SDOG offers an attractive alternative to either SPHD, for those who emphasize dividend yield, or FYD, for those who emphasize total return with low volatility.
The one place I might see SDOG as having some potential is as a volatility play. Trough to peak returns are strong, thanks to those deep downdraws and the fund's high returns. But that assumes extreme skill and luck in calling bottoms and tops. If you feel confident at that game, there are certainly more appealing opportunities where you can exercise that skill.
This should wrap up my reviews of dividend ETFs. I know there are others that readers have asked about but I’m satisfied that I can make my views clear here with the information at hand. Do add your voice, and as much hard data as you have to back up your choices, in the comments here. One key thing I’ve not looked at is the differences in investment strategies among the funds. I may try to put that together in an overarching summary of these ten funds beyond the data. I’m travelling for the next couple of weeks, so it could give me something to occupy my time on the long plane ride.
