Dividend exchange-traded funds have been some of the best-performing funds this year.
ETFs such as iShares Select Dividend and SPDR S&P Dividend gained 15% in the first half this year, while the S&P 500 was up just 3.8%.
But while dividends are clearly in favor, not every dividend ETF is worth owning. Some simply don't trade often, and these thinly traded ETFs tend to have wide spreads between the bid and the ask price.
This spread is a cost to investors and is on top of the ETF's expenses and any trading commissions.
ETFs that don't trade well also may experience larger or more frequent discrepancies between their net asset value and the value of the underlying securities.
And when the market comes under pressure, a small, poorly traded ETF may not be easy to sell, and that is a big deal, considering that many investors own ETFs because they think that they can sell them at any time.
So what dividend ETFs don't trade well?
Here are three ETFs to avoid:
1. QuantShares Hedged Dividend Income (DIVA)
This ETF invests in high-dividend paying stocks like other top-performing dividend ETFs, so investors might think that it is just as good as iShares Select Dividend or SPDR S&P Dividend.
But though those two are heavily traded, with more than 1 million shares of each often changing hands in a single day, QuantShares Hedged Dividend Income has days and even weeks when it doesn't trade at all.
When the ETF does trade, it often has wide spreads, with the average over the past 60 days at 0.74%, according to ETF.com.
The average spread for iShares Select Dividend and SPDR S&P Dividend, on the other hand, was just 0.01% and 0.03%, respectively. This means that if QuantShares Hedged Dividend Income gained 5%, the gain would be just 4.26%, but investors who bought iShares Select Dividend instead and saw it gain 5%, would actually reap a 4.99% rise.