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Trying to Become Top Dog

NEW YORK ( ETF Expert) --There are times when I like what an exchange-traded fund asset is offering the investment public... at least in theory. Yet, over time, an ETF may fall short on things like tracking error, performance, methodological changes, liquidity and provider commitment.

In the case of ALPS Sector Dividend Dogs (SDOG), the relative newcomer's theoretical construct appears sound. More importantly, the early indications are positive for SDOG -- from "trade-ability" via the reasonable bid-ask spread to performance that compares favorably with Vanguard High Dividend Yield (VYM).

What is SDOG exactly? It is an ETF that endeavors to expand upon an exceptionally popular investment approach called, "Dogs of the Dow." Whereas the original encourages investors to select a number of the highest yielding Dow components annually (at the start of the year), SDOG invests in the five highest-yielding stocks in each of the S&P 500's 10 sectors. It equal weights the 50 constituents, rebalances quarterly and reconstitutes annually.

In theory and in practice, SDOG is more diversified than other dividend funds. Vanguard High Dividend Yield has roughly 20% in consumer staples and 13% in energy. iShares High Dividend Equity (HDV) has 25% in health care and 18% in utilities. In contrast, SDOG typically has 10% allocated to each and every sector, and approximately 2% in each of the 50 stocks.

At this moment in time, SDOG appears it will provide a greater income stream. Annualized, it may distribute in the neighborhood of 4%, whereas VYM and HDV are closer to 3%.

The annual expense ratio of 0.40% for SDOG is reasonable, as the cost of ownership is the same as HDV. However, Vanguard still reigns supreme in the world of lowest cost indexing; VYM is a steal at 0.13%. Considering the likelihood that a buy-n-hold owner of SDOG could be forfeiting 0.27% on a compounding basis annually, an owner would need to determine that SDOG has significantly greater long-term potential.

SDOG has been a top dog among its competitors since its July 16 inception date. Then again, a 3 1/2 month time trial isn't much to go on.

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