For Dividend ETFs, Watch Large Weightings

NEW YORK (TheStreet) -- One of the first categories of specialized exchange traded funds was dividend ETFs, with the first one popping up in late 2003. Since then, many other ETF providers have created dividend ETFs, including WisdomTree, whose founding was solely based on the category.

I've written quite a few articles about broad-based dividend ETFs, each with the same refrain: Watch the financial sector exposure. Regardless of the methodology, most of the funds had 30% to 40% weightings in the industry when they debuted a few years ago versus roughly 20% for the S&P 500 Index. Owning a fund with 40% in financial stocks isn't necessarily a bad thing. But if your other funds have a large chunk in financials, then you'll be overexposed.

The case for dividends is compelling for long-term investors. The stock market has had an average annual return of roughly 10% over the long term, about 40% of which has been generated by dividends. If dividends produce a big piece of an investor's returns, he'll be able to sleep peacefully, as his risks are reduced. The investor won't have to expect too much from price appreciation. ...