If you’re outside the US looking in, there are important pros and cons to adding exchange traded funds from America to your portfolio, writes John Heinzl, reporter and columnist for Globe Investor.

There’s good news and bad news when it comes to investing in US dividend stocks.

The good news is that there are scores of great companies south of the border that regularly raise their dividends. The bad news? With so many dividend stocks to choose from, trying to pick the best ones for your portfolio can turn into a full-time job.

That’s where exchange traded funds come in. Like mutual funds, ETFs give you instant diversification. Unlike mutual funds, they have low fees and can be traded throughout the day. That explains why more investors are gravitating toward ETFs, and why companies are falling over each other to launch new ones.

With bond yields at microscopic levels and investors eager for income, it should come as no surprise that dividend ETFs are among the hottest products out there. We don’t have time to look at all of them, so today we’ll examine the five largest US dividend ETFs, in descending order of assets under management.

There are a couple of things to keep in mind:

  • First, US ETFs expose you to currency fluctuations. So if your local currency rises, the value of your investment will fall. If you’re uncomfortable with that, you could consider a currency-hedged ETF such as the iShares S&P US Dividend Growers Index Fund (Toronto: CUD). But remember that there are costs for currency hedging, and it’s far from an exact science.
  • Second, Canadians should consider holding US dividend ETFs in a registered retirement savings plan or registered retirement income fund. That way, there should be no US withholding tax on the dividends.

Vanguard Dividend Appreciation ETF (VIG)

Assets: $13.3 billion

Holdings: 134

Expense ratio: 0.18%

Yield: 2%

This bargain-priced ETF proves that you don’t need an outsized yield to generate solid results. VIG had the highest annualized five-year return (4%, including dividends) and a year-to-date return (7.6%) near the top of the pack, according to indexuniverse.com (all returns are as of March 31).

Designed to track Mergent’s Dividend Achievers Select Index, the fund features companies with consistent earnings growth and dividends that have risen for at least ten consecutive years. Think Coca-Cola (KO), Procter & Gamble (PG), Wal-Mart (WMT) and McDonald’s (MCD), to name a few.

iShares Dow Jones Select Dividend Index Fund (DVY)

Assets: $10.1 billion

Holdings: 100

Expense ratio: 0.4%

Yield: 3.4%

You’ll pay a bit more for this ETF, but you’ll also get the highest yield of the group. The above-average yield reflects two things: a hefty 31% exposure to utilities, and a methodology that gives the heaviest weightings to the fattest yielders in the index.

Proving once again that yield isn’t everything, however, the five-year annualized return is an uninspiring negative 0.9%—the only ETF in the red for this period. But the ETF redeems itself with a three-year return of nearly 26%—good for top spot.

SPDR S&P Dividend ETF (SDY)

Assets: $9.2 billion

Holdings: 60

Expense ratio: 0.35%

Yield: 3.1%

This ETF seeks to match, before expenses, the performance of the S&P High Yield Dividend Aristocrats Index, which comprises the 60 highest-yielding S&P 1500 members that have raised dividends annually for at least 25 consecutive years.

It has the fewest holdings, but the ETF is reasonably diversified, with consumer staples, financials, industrials, and consumer discretionary making up about two-thirds of the total. Three-year and five-year annualized returns are 18.1% and 2.3%, respectively, which puts it in the middle of the pack.

Vanguard High Dividend Yield Index ETF (VYM)

Assets: $4.5 billion

Holdings: 439

Expense ratio: 0.13%

Yield: 2.8%

This fund has two big advantages: The lowest management expense ratio and the largest number of holdings, including all the big-cap dividend names you’d expect—Exxon Mobil (XOM), Microsoft (MSFT), General Electric (GE), Procter & Gamble (PG), Pfizer (PFE) and so on.

Based on the FTSE High Dividend Yield Index, the ETF has the second-best three-year annualized return (20.7%) and third-best five-year return (1.9%).

iShares High Dividend Equity Fund (HDV)

Assets: $1.4 billion

Holdings: 75

Expense ratio: 0.4%

Yield: 2.5%

It’s hard to make any definitive statements about this ETF because it’s only been around for a little more than a year, but one thing stands out: the excessive weighting of some stocks. AT&T (T), for example, accounts for nearly 10% of the portfolio, Pfizer represents about 8%, and Johnson & Johnson (JNJ) makes up about 7%.

The 0.4% MER isn’t exactly cheap, either, and the performance numbers are uneven. The one-year return of 15.8% is good for first place, but the year-to-date return of 3.9% ranks dead last.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: United States Brent Oil Fund

    Learn more about the United States Brent Oil exchange-traded fund, the characteristics of the fund and the suitability and recommendations of it.
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Bloomberg Crude Oil

    Find out more about the ProShares Ultra Bloomberg Crude Oil ETF, the characteristics of UCO and the suitability and recommendations of UCO for investors.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Hong Kong

    Learn about the iShares MSCI Hong Kong fund, which invests in various equities of companies listed on the Hong Kong Stock Exchange.
  4. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Growth

    Take a close look at the Vanguard Small-Cap Growth ETF, which focuses on domestic small-cap equities with a fundamental growth strategy.
  5. Mutual Funds & ETFs

    ETF Analysis: First Trust Dorsey Wright Focus 5

    Take a closer look at the First Trust Dorsey Wright Focus 5 ETF, a unique and innovative fund of funds based on momentum and relative strength.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares National AMT-Free Muni Bond

    Take an in-depth look at the iShares National AMT-Free Municipal Bond ETF, a highly diverse and very popular muni bond fund.
  7. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  8. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  9. Mutual Funds & ETFs

    7 Best ETF Trading Strategies for Beginners

    Exchange-traded funds are ideal instruments for beginning traders and investors. Learn the seven best strategies for trading ETFs.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Fractal Markets Hypothesis (FMH)

    An alternative investment theory to Efficient Market Hypothesis ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!