By Michael Johnston:
ALPS, the firm behind the Equal Sector Weight ETF (EQL - News), is debuting a new fund that combines aspects of equal sector weighting with high dividend-paying stocks. The new ALPS Sector Dividend Dog ETF (SDOG - News) will apply the well known “Dogs of the Dow” methodology to a broader index of stocks, drawing its components instead from the S&P 500.
The Dogs of the Dow strategy, popularized in the early 1990s by Michael O’Higgins, is a very simple strategy: it involves picking the ten components of the Dow Jones Industrial Average with the highest dividend yield each year. This strategy is premised on the idea that companies do not alter their dividend to reflect trading conditions, and that therefore the payouts made to shareholders are more indicative of long-term value. Using that logic, it follows that the companies with the highest yield should maintain the greatest price appreciation potential–while simultaneously delivering attractive current returns.
SDOG: A Few Twists
The new dividend ETF from ALPS will implement the basic Dogs strategy–picking stocks with the highest dividend yields–but with a few twists that provide greater depth and balance in the underlying portfolio. Most notably, the underlying index selects from the S&P 500, which gives it a considerably wider universe than most traditional Dogs of the Dow strategies.
SDOG will also be more balanced from a sector perspective, which should differentiate it from other dividend-focused ETFs. Many of the existing dividend ETFs tend to be concentrated in high yielding sectors such as utilities and telecom, and light on technology and other sectors not known for hefty distributions. SDOG, on the other hand, will maintain material allocations to all corners of the market. That strategy could have appeal for investors who are looking to avoid concentrations in particular sectors, as well as those who believe equal weighting represents a more efficient allocation strategy than market cap weighting.
SDOG will utilize equal weighting at both the sector and stock level. In other words, the portfolio will be broken down with:
- 10% allocated to each sector
- 2% allocated to each individual stock (so, five stocks per sector)
Generally speaking, dividend ETFs tend to be linked to cap-weighted or dividend-weighted indexes. Global X, however, does offer an equal weighted strategy through its SuperDividend ETF (SDIV - News). That fund maintains a global focus, and spreads exposure across 100 component securities.
ELEMENTS has offered an ETN linked to the Dow Jones High Yield Select 10 Total Return Index (DOD - News) since 2007. That index implements the Dogs of the Dow strategy, but has struggled to catch on with investors. DOD has fewer than $10 million in assets.
Under The Hood
The portfolio of SDOG includes a number of the usual suspects, as well as some stocks that investors might not normally find in dividend-focused products. AT&T, Chevron, and Pfizer are all represented, along with companies such as Paychex, Cablevision, and Waste Management [see SDOG fact sheet for all index holdings].
|S&P 500||SDOG Index|
|Data for indexes, as of 6/15|
SDOG will charge an annual expense ratio of 0.40%, which is roughly in line with the average for the Large Cap Value Equities ETFdb Category. Expense ratios for dividend ETFs range from 0.13% to 0.88%.
Disclosure: No positions at time of writing.
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