Dividend ETF Shuffle

NEW YORK (TheStreet) -- The slew of positive economic data we have witnessed during the opening weeks of 2012 has helped to inject a welcomed dose of confidence into the hearts of investors, culminating at the start of the week with the Dow Jones Industrial Average ascending back to the 13,000 level for the first time since early 2008.

With rising optimism, it is understandable that investors may be questioning whether it is still necessary to maintain their exposure to the safe haven holdings that proved so popular during the choppy final months of 2011.

The idea of holding onto dividend-paying ETFs like the iShares Dow Jones U.S. Dividend Select Index Fund ( DVY) may seem foolish during periods of euphoria. These reservations are further aided when comparing the performance of DVY and other dividend ETFs against major stock market indices.

After leading the pack last year, DVY and the iShares High Yield Equity Fund ( HDV) have struggled to capitalize, locking in year-to-date returns of approximately 3% and less than 1% respectively. The SPDR S&P 500 ETF ( SPY), meanwhile, has rallied over 8%.

The fact is, though, that many of the same daunting challenges we faced during those rocky months continue to be in play. Therefore, I still feel that there is a case for setting aside exposure to yield-bearing equity ETFs. Aggressive investors, however, may find comfort knowing that there are alternatives to DVY and HDV that appear to be doing a better job trading in line with the markets at this time.

Heavy exposure to lagging sectors like utilities and health care has been a major contributing factor to the laggard action seen from DVY and HDV. Therefore, it is not surprising to see that dividend-focused products like the Vanguard Dividend Appreciation ETF ( VIG) and the SPDR S&P Dividend ETF ( SDY), which offer less exposure to these weak points, have become the leaders here.

HDV -- the worst performer of the group -- sets aside over 40% of its portfolio to this duo. VIG, which sits on the opposite end of the spectrum with year-to-date returns totaling 5%, lists health care and utilities as minor slices, accounting for a combined 7% of its assets.

Rather than leaning towards these non-cyclical sectors, VIG homes in on the consumer and market-correlated sectors. Industrials, which account for less than 4% of HDV's index, represent nearly a quarter of the fund's portfolio.

All four of the options listed above are appropriate for investors looking to maintain exposure to the equity markets while earning consistent income, but it is clear that funds like HDV and VIG are best-suited for different risk tolerances and investing environments.

In this current market, investors may be tempted to unload their exposure to any and all yield-bearing equities in order to make room for riskier holdings. Before abandoning this corner of the equity markets entirely, however, make sure to take a look at which fund you are using for representation; sometimes, by simply transitioning to a fund like VIG from DVY, it is possible to capture some of the sought-after upside potential without having to take on an excessive amount of additional risk.

Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion Money Management owned the iShares Dow Jones U.S. Dividend Select Index Fund.