Conventional wisdom would tell you that funds and ETFs would be safer and less volatile than owning individual stocks, and there is certainly some truth in that statement. However, in my personal portfolio in 2008, my income EFTs and funds have been more volatile and produced lower returns. Through March 24th, my income stocks total YTD return is a loss of (-0.6%) versus a loss of (-1.9%) for my income ETFs/funds.
It is no surprise that my Vanguard Financials ETF (VFH) is the biggest loser. VFH has a YTD total return loss of (-4.8%). I was more surprised by the performance of SPDR S&P Dividend ETF (SDY). Going into the weekend it was my second biggest loser, but has recovered some on Monday. Once I checked its sector breakdown on Morningstar, I understood what was driving it down. SDY is 35.54% weighted in financials.
In a recent MarketWatch article, "Dividend ETFs yield to pain in financials stocks", Matthew Hougan, editor at IndexUniverse.com, said it's important for investors to study the differences in the dividend ETFs' approaches before committing money. He went on to say:
"These dividend ETFs were to an extent presented as alternatives to traditional market exposure," he said. "They were put out there as a mainstream way to go after the whole market, but the poor returns recently have showed what you could have found out with a little digging -- these ETFs can have significant sector bets."He noted that iShares Dow Jones Select Dividend has almost 70% of assets concentrated in just two sectors: financials and utilities."Investors have to be aware of the sector allocations," Hougan said. "Maybe this is a wakeup call that these dividend ETFs shouldn't be considered mainstream funds."
Like all my investments, ETFs are periodically reviewed to determine their performance versus my benchmark. As mentioned in an earlier post, I am in the midst of a comprehensive project to calculate my asset allocation across all my investments. This project should be complete in early to mid-April and I will post the results here when available.