Note: I use the Stock Selection Guide Software and its methodologies from the CSA to perform the bulk of my analysis on stocks. This is not a recommendation to buy a stock – it is my analysis only. Please do your own research.
I am going to do something a little bit different this week. As you known, every Wednesday I have a look at one dividend stock and run through the analysis that I go through to get to a buy price for that company. This week, I thought it would be a cool idea to look at an exchange traded fund (ETF) and run through a bit of an analysis on that. Like individual dividend stocks, dividend based ETFs need to be examined to ensure they are the right asset for an account. It would be unwise to just pick any old index fund.
Which Index Fund to Examine
So the first question that obviously comes to mind first is how to select a ETF to examine? This is easy thanks to the folks over at Morningstar. In the tabbed menu on the main page, there are a number of tabs – click on the one called ETFs. Then in the middle of the page there is a section called “Most Popular ETFs by Trading Volume”. At the bottom of this table click on the View Complete List and you will see all the most highly traded ETFs by trading volume. This is an amazing starting point for any investor who is looking for ETFs. You can then filter the results based on investment style (large-cap value, small-cap value, etc) or to only show the top 20. For the purposes of this excersise, I simply searched for the first dividend focused ETF and decided to go with that – it is the iShares Dow Jones Select Dividend Index (DVY).
The iShares Dow Jones Select Dividend Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Select Dividend Index. The Dow Jones U.S. Select Dividend Index, measures 100 leading U.S. dividend-paying companies and is derived from the Dow Jones U.S. Index, which covers approximately 95% of U.S. market capitalization. Stocks are screened by dividend-per-share growth rate, dividend payout ratio and average daily dollar trading volume, and are selected based on dividend yield.
When examining ETFs, it is important to ensure that the stated investment objective of the fund meets your objectives for that fund in your portfolio. If you are looking for a dividend based index fund, then ensure that is the funds objective. This seems obvious, but it can be easily overlooked.
Top 25 Holdings
Any ETF will have a number of stocks that make up the index as its top holdings. The top 25 stocks in the iShares Dow Jones Select Dividend Index are:
Keep in mind that if you already have a number of these stocks covered in other funds or individual stock holdings then you are increasing your investment in these stocks by buying the fund. This must be considered in terms of your overall sector and asset allocation.
When investing in ETFs the analysis of the funds performance is how it did relative to its underlying index. It is not necessarily how the overall index has performed in the past. We can look at this from two sources. The first is from Morningstar who compares the ETF to the S&P 500 and Large Cap Value stocks but not the actual underlying index:
At the iShares website, they review the performance of the ETF to the actual Dow Jones Select Dividend Index:
As we can see the ETF has done a good job tracking both the overall market and the actual index. As to be expected, it lags a bit because of fees but nothing out of the ordinary.
Fees and Expenses
If we are buying index products, then fees should be low. The iShares Dow Jones Select Dividend ETF has an MER of 0.40% which is pretty good. It is not as low as the iShares S&P 500 Index Fund (IVV) which is at 0.09%. It appears that the company’s strategy is to have higher fees for more the specialty funds. I am not sure why this is (perhaps iShares you can tell us?) but the 0.40% is still significantly lower than the average mutual fund.
Dividend Distribution Policy
It is a good idea to check the dividend distribution policy on any ETF, whether it is dividend focused or not. The iShares Dow Jones Select Dividend fund states the following in the prospectus:
As you can see, we are basically just confirming the details of the fund so that we fully understand what it is we are investing in. By selecting the top traded ETFs, then there is some comfort that the fund is widely tracked and monitored. Looking at the top holdings provides us with a confirmation of the funds objectives, as well as to make sure we have considered our overall asset and sector allocation. Finally, examining fees is crucial to make sure we are not over-paying.
If you hold this fund, then please let me know what your experience has been with it and why you bought it. I would greatly appreciate other viewpoints and I think my readers would as well.
Disclosure: The Dividend Guy does not own shares in iShares Dow Jones Select Dividend fund. This is my analysis of the stock and is not investment advice. Do your own research.
(Photo Credit: Ulrik De Wachter)