Dividend Growth ETF Offers Best of Both Worlds

NEW YORK ( ETF Expert) -- Buying-n-holding every investment asset is detrimental in secular bear markets. Granted, one can debate whether or not we've been witnessing a series of smaller bull markets within a grizzlier picture. However, there's no denying the benefits of actively reducing downside risk prior to (and during) the 2000-2002 tech bubble or the 2008-2009 credit collapse.

At the same time, investors are always searching for investments that they may hold forever. (And if that's not possible. . . five years instead of five months!)

The latest example of the trend is the increasing popularity of dividend ETFs. At one time, the iShares DJ Select Dividend Index Fund ( DVY) was the most coveted vehicle in its class. Why? Advisers could pick it up for clients or recommend it to them with the so-called long term in mind.

The problem? Financial stocks used to account for the lion's share of corporations in the DJ Select Dividend Index. Rather than serve as a "no-brainer," it served as a colossal headache for lazy advisers who don't check under the hood or who don't adjust their portfolios.

Dividend-payers were supposed to be safer. Dividend-producers were supposed to be less volatile. Yet, over the last five years, DVY has been more volatile and less successful than the S&P 500 SPDR Trust ( SPY).


Of course, things have already changed in the dividend arena. Financial companies only account for 10% of the DJ Select Dividend Index that DVY tracks today; it accounted for upwards of 25% in 2007. Meanwhile, WisdomTree Top 100 Dividend Fund ( DOO) changed its make-up entirely, banishing financial companies altogether and recasting itself as the WisdomTree Dividend Ex-Financials Fund (DTN).

In theory, I like the improvements in DTN and DVY. In practice, it makes more sense to recognize when funds like DTN and DVY are struggling in your portfolio, and sell them. Whether you used stop-limit loss orders or trend analysis to minimize risk, or whether you simply recognized that banks were the toxic element, selling DVY or DTN in 2007 or 2008 was sensible.

Looked at another way, selling in 2007 or 2008 opened the door to new dividend-investing opportunities in future years. Some of my top holdings today include PowerShares Low Volatility ( SPLV) and iShares High Dividend Equity ( HDV). The former is an accidental high yielder by way of slow-moving staples and utilities, while the latter offers greater exposure to health care, telecom and consumer stocks.

Of course, there will always be efforts to construct the perfect, "don't-have-to-touch-it" portfolio. For these, I recommend a different approach to dividend success. Specifically, Vanguard Dividend Appreciation ( VIG) tracks the Dividend Achievers Index -- a collection of companies with a steady record of growing dividends year over year. In essence, you're foregoing the companies with higher annual yields and pursuing the corporations that raise the cash payouts consistently.

Does a "dividend appreciation" or "dividend growth" approach work? Over the last five years, Vanguard Dividend Appreciation didn't have to change its strategy or its name; it beat the S&P 500 SPDR Trust as well as the Dividend ETF competition. If you're going to be a holder-n-hoper -- and I hope that you won't -- VIG may just be the premier dividend choice.
Disclosure Statement: ETF Expert is a Web site that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.