Newer Dividend ETF Rivals Original

It has been popular lately to make fun of some of the "me too" exchange-traded funds, as providers pile into crowded fields to launch similar offerings.

Dividend ETFs are often the target of such derision, but they keep coming. The original dividend ETF was the iShares Dow Jones Select Dividend Index(DVY Quote). One of the first "me too" dividend ETFs was the State Street SPDR Dividend(SDY Quote).

Being first -- which is often considered important in the world of ETFs -- does not necessarily mean being the best. DVY has been around for several years. But the Johnny-come-lately SDY has proven itself worthy of consideration since its listing in November.

DVY's methodology seems to be more qualitative, as it screens for things like payout ratios and dividend growth rates. SDY owns the 50 highest-yielding stocks in the S&P 1,500 (the S&P 500, Mid-Cap 400 and Small-Cap 600 all combined) with a 25-year track record for dividend growth.

As you can see from the chart below, the slight differences in composition have not mattered very much yet. There have been several instances in which DVY has lagged, but that lag, in the few times it occurred, seems to have been contained at 1%.

But there are some structural differences that, although they haven't mattered a lot so far, could matter in the future.

DVY has a 40% weight in the financial sector, compared to only 25% for SDY. The current flat/mildly inverted yield curve makes lending money less profitable. This is an obvious obstacle to the financial sector. At some point the curve will normalize, and the issue will be out of the way for the sector, but if this economic cycle is normal, things likely will get worse for financials before they get better. In this case, the dividend ETF with less exposure to the sector, the SDY, could be a better hold.

Both SDY and DVY have slightly more than 20% of their holdings in the utility sector, which, although considered interest rate sensitive, has held up very well over the last couple of months as the broad market has been rolling over.

Performance Parallels DVY and SDY have similar movement, but structural differences

Source: BigCharts

I have been overweight dividends for client accounts for the last few years. In doing so, I have tried to maintain a higher yield than the S&P 500, which currently yields 1.8%. In an environment in which stocks don't go up or down a lot, picking up extra yield can make a big difference in returns.

Either SDY or DVY gives this bigger yield effect to investors not wanting to take on a single stock risk. SDY yields 2.9%, and DVY yields 3.6%.

Another aspect of the dividend funds is their potential to serve as substitutes for the S&P 500. By looking at the chart above, it seems that though the correlation has been close, the ride of the dividend funds has been smoother. Moreover, they yield more. This seems like a no-brainer.

But not so fast, my friend. As "dead" as tech stocks are right now, at some point they will again provide substantial outperformance. When that happens, these tech-starved funds will lag behind. Remember, dividends were out of favor and considered passé eight years ago, and that may happen again.

But dividends have their place, and for the next couple of years, SDY might be a better proxy for large-caps, even if it is a "me too" ETF.