Even though markets are surging higher, income investing remains as popular as ever. This is especially true in the dividend ETF world, as many top income funds have seen huge inflows to start 2013.
Seemingly, investors continue to embrace these products as a way to achieve equity appreciation with a lower level of risk. It also doesn’t hurt that many are concerned about the Fed looming over the market, causing some to reconsider their bond holdings for the long term.
However, not all dividend ETFs are created equal, and some have fallen by the wayside in terms of popularity to start the year. ETFs like the WisdomTree Dividend ex-Financials Fund (DTN) and the First Trust Morningstar Dividend Leaders Fund (FDL) both have seen outflows to start the year, despite the overall bullish tone in the market.
This hasn’t been a problem for some funds in the space though, as a few have seen huge inflows to start 2013. In fact, a handful have captured a great deal in assets, suggesting that sentiment is extremely bullish on these few products going forward.
While some might scoff at looking at popularity to find trends in the space, the strategy does have some merit. It can show the ETFs—and investment segments—that are increasingly in favor with investors, and which are believed to be the best places for portfolios going forward.
After all, we have seen a huge increase in invested capital for a number of Japan ETFs such as DXJ—timed along with the country’s surge—to start 2013, while we have also witnessed a big outflow in gold and gold mining ETFs like GDX, alongside a historic plunge in this commodity to open up the year (read Three Most Popular ETFs of February).
So there can definitely be something to looking at the top asset accumulating ETFs in the time period as a signal for trends heading into Q2 and beyond.
For investors subscribing to this theory, we have highlighted below three dividend ETFs that have led the way in terms of AUM accumulation so far in 2013. All three have gained more than four times as many inflows as the average unleveraged equity ETF in the time frame, suggesting they are surging up the popularity charts.
Due to this factor and some of the current market conditions favoring equities—and especially income generating stocks—over bonds, any of these three could be great choices for those seeking to ride a wave of popularity higher in the dividend ETF space:
iShares Dow Jones EPAC Select Dividend Index Fund (IDV)
This dividend ETF has seen nearly $300 million in inflows to start 2013, a level far in excess of many other products this year. It is especially noteworthy as it is one of the few broad developed market ETFs to see such impressive inflows in the time frame (read 4 International ETFs Yield more than 5%).
The ETF has nearly 20% of its assets in financials, and then about 14% in industrials, and 13% in both energy and utilities. Large caps do account for the bulk of the assets, while European securities make up roughly two-thirds of the total as well.
IDV does have a truly impressive yield though, as the fund is currently sporting a 5.3% 30 Day SEC payout. The cost is a bit higher at 50 basis points a year, but the fund does have a high volume and tight bid ask spread, which should keep overall fees low.
For a pick closer to home, many investors have pushed towards this U.S.-centric high dividend ETF. The fund has seen more than $470 million in inflows to start the year, putting it into the top 50 equity funds for the time frame.
The dividend ETF is ripe with household names though, as a variety of U.S. large caps dominate the top holdings. Consumer staples take up about 20% of the assets, followed by 13% for health care, energy, and industrials (see Guide to 10 Great ETFs Yielding 7% or More).
The yield for this fund comes in at 3.1% for 30 Day SEC terms, a robust level when compared to many bond products. Furthermore, the ETF is an ultra-low cost choice, costing investors just 0.1% a year in fees, along with very high volume.
This fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ while it has a medium risk rating.
The most popular dividend ETF—by inflows—to start 2013 is the ever trendy VIG. This ETF has seen over one billion in fresh assets this year, enough to put it in the top 10 for inflows to start the year.
The fund does have similar holdings to its cousin VYM, but a little bit of a difference. This dividend ETF looks to zero in on companies that have a track record of increasing their dividends year after year, rather than a pure focus on yield.
This results in a fund that has about 150 securities that have a heavy large cap focus. Household names are again atop the fund, with a big holding in consumer staples and industrials.
The focus on dividend growth does reduce the yield to a level of just 2.2% in 30 Day SEC terms, easily the lowest on the list. However, it does have a low expense ratio of just 13 basis points and it has outperformed the S&P 500 to start the year (see Two Unconventional Sources of ETF Yield).
This fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ while it has a low risk rating.
Bottom Line
Yes, equity markets are broadly at, or are within striking distance, of all-time highs. But investors still continue to embrace dividend ETFs as great ways to obtain broad market exposure, as they can arguably offer up the best of both worlds in the current investing landscape.
Though, investors should note that there are literally dozens of choices out there that can offer up great exposure to this space. This can make sorting through the market very difficult, especially in generally positive market conditions.
For this reason, it could be a good idea to take a closer look at ETFs that have seen a surge in popularity to start 2013. Not only are there a number of great dividend focused options in this group, but they could be impressive picks for many investors if current trends in the market hold into the second quarter.
If you still aren’t sold, consider that all three of the ETFs highlighted above have beaten out the S&P 500 over the past six month period, further showing that investing in popular dividend ETFs could be the way to go in this market.
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