Investors have mostly targeted two areas of the market since the bear market low nearly a year ago - cyclical stocks when they believe that the global economic recovery is becoming more likely and growth stocks when they're optimistic about the Fed's cheap money policies and more stimulus.
The one group that's largely fallen through the cracks is dividend stocks.
Dividend stocks and ETFs get indirectly swept up in a cyclical rally because they tend to be overweight in financials and energy, but fund flows data shows that investors are not really targeting them directly.
That doesn't mean that there aren't dividend ETFs that are killing it so far in 2021.
Many of the largest and most well-known ETFs are trailing the S&P 500 year-to-date. The large-cap focus of these funds is probably most to blame as investors have targeted the big growth names within this segment of the market.
Where dividend ETFs have done best is when they focus on the hottest areas of the market. In other words, the riskier, the better. Funds targeting small-caps, cyclicals and, frankly, companies with comparatively poor balance sheets have generally performed better in 2021.
While each of these funds is outperforming the S&P 500 so far in 2021, the downside is that several are underperforming their more direct comparable indexes. Small-caps and emerging markets, in particular, have done very well this year, but those returns have been boosted by growth stocks more than dividend payers. Still, year-to-date total returns of 9-10% from dividend stock ETFs are something that shouldn't be ignored.
Let's take a look at five dividend ETFs that have significantly outperformed the S&P 500 this year and have provided an above average dividend yield to boot.
WisdomTree U.S. Small Cap Dividend ETF (DES)
Dividend Yield: 2.52%
Year-to-date Return: 10.53%
DES provides broad coverage of the small-cap dividend-paying stock universe. The underlying index is comprised of companies that compose the bottom 25% of the market cap of the WisdomTree U.S. Dividend Index after the 300 largest companies have been removed. The index is dividend weighted to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year.
I generally like the idea of dividend weighting a portfolio since it helps to avoid the inherent problems of yield weighting and the potentially low yields that come with many dividend growth stocks.
Because it focuses on more mature dividend payers, it tends to tilt a little more value than growth, a tilt that is finally not automatically penalizing funds for in 2021. Volatility is a little higher due to its small-cap focus, but other factors, including quality and momentum, remain about on par with what you'd expect.
DES has the added benefit of yielding more than 1% higher than the S&P 500.
Global X SuperDividend U.S. ETF (DIV)
Dividend Yield: 7.01%
Year-to-date Return: 10.74%
DIV's strategy of simply targeting the highest yielding stocks within the U.S. market has played right into its favor this year. Last year, the overweights in energy and REITs killed its performance, but 2021 has been a different story.
The fund's cyclical overweights have benefited due to the extreme value nature of these sectors and the fact that investors are willing to give them another look with an economic recovery looming.
Any signs that the recovery may be slowing or reversing would likely turn DIV into an underperformer again, but given where we are with vaccines, the economy seems more likely than not to continue growing throughout 2021. That puts DIV in a favorable position. That 7% monthly pay yield is also attractive.
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
Dividend Yield: 4.33%
Year-to-date Return: 9.26%
Here's a simple premise. SPYD targets the 80 highest-yielding stocks from the S&P 500. In that sense, its strategy is very similar to that of DIV, yet starts with a somewhat different starting universe.
The composition of SPYD also looks similar. It's heavy in financials, REITs and energy making it heavily cyclical in nature. In other words, it needs the global economic recovery to remain intact in order for it to outperform here. Tech and communication services account for a mere 14% of this portfolio compared to roughly 40% in the S&P 500.
Given its entire focus on yield, SPYD scores lowly on quality, momentum and low volatility measures. Not surprisingly, it also falls heavily on the value-tilted end of the spectrum.
AAM S&P 500 High Dividend Value ETF (SPDV)
Dividend Yield: 3.88%
Year-to-date Return: 9.14%
Also employing a high yield targeting strategy, SPDV is the first fund on this list to add a thematic component to its mandate. It starts with the 55 highest yielding stocks in the S&P 500, but layers on a sustainability screen by looking at free cash flow yield as well. This helps make sure that the companies included in the fund's index generate the cash flows necessary to support the continued payment of dividends going forward.
SPDV looks a lot like the other funds on this list - value-oriented, above average yield - but has a better quality factor than those focused on yield alone.
WisdomTree Emerging Markets Quality Dividend Growth ETF (DGRE)
Dividend Yield: 1.57%
Year-to-date Return: 9.89%
This is a bit of a cheat comparing an emerging markets ETF to the S&P 500, but its year-to-date return in still compelling. Not surprisingly, it does trail the broader emerging markets indices year-to-date as its focus on mature companies hasn't necessarily been in the market's wheelhouse.
Because DGRE focuses on dividend growth instead of yield, it rates higher for quality and low volatility, but worse for yield (as evidenced by the modest 1.6% dividend). It also has a much better balance between growth and value giving it bit more long-term capital growth potential than some other dividend ETFs.