It is often said that dividend investing is inherently defensive, but as the landscape of exchange traded funds (ETFs) experiences exponential growth, advisors and investors should remember that not all dividend-oriented strategies offer comparable defensive postures.
Data suggest that as equity market volatility jumped in the fourth quarter of 2018, investors scurried to embrace conservative sectors, such as consumer staples and utilities, and dividend ETFs. In the last three months of 2018, investors allocated $8.3 billion to dividend ETFs, erasing the $3.1 billion of outflows from those products seen in the first three quarters of the year, according to CFRA Research’s Todd Rosenbluth.1
The combination of defensive sectors and dividend investing often leads to above-average dividend yields. At the end of last year, consumer staples and utilities were two of the three highest yielding sectors in the S&P 500. The S&P 500 Consumer Staples Index and the S&P 500 Utilities Index had an average dividend yield of 3.30 percent at the end of last year compared to 2.23 percent on the S&P 500.2
Defense And Value Meet
Some investors associate value investing with defensive investing, but the expansive universe of smart beta ETFs emphasizing the value factor indicates that assumption cannot be applied in blanket fashion to all value funds.
“ETF issuers have launched Value-focused products for various sectors and indices, offering investors choice but also increasing the complexity in asset allocation,” said Factor Research. “A few of these were launched in 2000, providing investors will almost two decades of data for performance analysis. Some of the ETFs are sector-focused, which explains the outliers in chart below. However, the majority of smart beta Value ETFs generate relatively homogenous returns.”3
To the point of sector weights, many traditional value ETFs have large weights to the financial services and energy sectors, two of the worst-performing sectors in the S&P 500 last year. At the end of December, those cyclical sectors combined for 29.30 percent4 of the S&P 500 Value Index while the more defensive consumer staples and utilities sectors combined for just 14.50 percent of that benchmark.
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In addition to potential sector concentration risks, some value ETFs may lack credible value stocks, exposing unknowing investors to other investment factors.
“We also observe that most smart beta Value ETFs show high exposure to the Size factor, which is explained by many products focusing on Value in small cap indices like the Russell 2000,” said Factor Research. “The exposure to other factors is low on average, but some ETF feature strong exposure to Low Volatility, Quality, and Growth, which may represent undesired risks for investors.”
The S-Network Sector Dividend Dogs Index equally weights the Global Industry Classification Standard (GICS), which can meaningfully increase the benchmark’s value proposition and defensive posture at a time when defense appears to be in style.
Accessing Value And Dividends
The ALPS Sector Dividend Dogs ETF (SDOG) targets the S-Network Sector Dividend Dogs Index. By virtue of that index’s equal-weight approach to sectors (and individual securities), investors can expect that when SDOG’s benchmark is rebalanced, its combined exposure to consumer staples, healthcare and utilities will be around 30 percent. As of Monday, Jan. 7th, the S&P 500’s combined exposure to those three defensive sectors was just 25.82 percent.
1 Source: CFRA Research analyst note Jan. 8, 2019 https://newpublic.cfraresearch.com/
2 Source: S&P Dow Jones Indices https://us.spindices.com/indices/equity/sp-500
3 Source: Factor Research January 2019 https://www.factorresearch.com/research-an-anatomy-of-smart-beta-value-etfs
4 Source: S&P Dow Jones Indices https://us.spindices.com/indices/equity/sp-500-value
An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus which contain this and other information call 844.234.5852 or visit www.alpsfunds.com. Read the prospectus carefully before investing.
Standardized performance for the ALPS Sector Dividend Dos ETF (SDOG) can be found here. Current holdings for SDOG can be found here.
ALPS Sector Dividend Dogs ETF Shares are not individually redeemable. Investors buy and sell shares of the ALPS Sector Dividend Dogs ETF a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
S&P 500 – The S&P 500® (Ticker: SPX) is an index of 500 stocks chosen for market size, liquidity and industry grouping among other factors.
S&P 500 Value Index is a market capitalization weighted index. All the stocks in the underlying parent index are allocated into value or growth.
S&P 500 Consumer Staples Index – The Consumer Staples Select Sector Total Return Index is a modified cap-weighted index. The index is intended to track the movements of companies that are components of the S&P 500 and are involved in the development or production of consumer goods.
S&P 500 Utilities Index – The Utilities Select Sector Total Return Index is a modified capitalization-weighted index. The index is intended to track the movements of companies that are components of the S&P 500 and are utilities.
Russel 2000 Index – The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization.
One may not invest directly in an index.
The content and opinions expressed in this article are that of the author and not the views and opinions of ALPS Advisors, Inc. In addition, ALPS Advisors, Inc. assumes no responsibility to ensure the accuracy of the content written by the author.
There are risks involved with investing in ETFs including the loss of money. Additional information
regarding the risks of this investment is available in the prospectus. Past Performance is not indicative of future results.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Sector Dividend Dogs ETF (SDOG).
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
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