Twenty years after the creation of the Dogs of the Dow theory, ALPS gave it a facelift with SDOG, and investors are taking notice.
As we have covered in this space over and over and over again, issuers are falling over each other to launch new high-yield strategies, and the length to which they will go to offer a new spin on the same story never ceases to amaze .
That’s not to say that all of the recent income launches are retreads or without merit.
That said, the recently launched ALPS Sector Dividend Dogs ETF (SDOG) is an example of an issuer taking a traditional investment strategy, looking for ways to improve it, and ultimately coming up with a product that appeals to a wide range of investors.
The original iteration of the Dogs of the Dow theory proscribed holding the 10 highest-yielding stocks in the Dow 30. This isn’t a practical strategy for an ETF bound by regulatory diversification requirements, so SDOG expands the selection universe to the S'P 500.
What’s more, the original Dogs theory was grounded in the idea that blue chip dividends are insulated and stable, whereas the market price of the stocks can vary greatly over time based on prevailing market conditions.
By extending the selection universe to the S'P 500 but not beyond it, SDOG upholds the blue chip nature of the original theory. Historically, negative dividend actions in the S'P 500 universe have been minimal in comparison with those in the non-S'P 500 universe, underlining the stable nature of the strategy.
Chasing dividends can be a dangerous game, and the longer this low-rate period extends, the more investors will be forced to pay up for any security with a yield of any kind. For traditional dividend indexes that screen and weight firms based on yield—either trailing or current—means that overpaying for firms in specific sectors like utilities and consumer staples as well as non-cyclicals becomes quite likely.
As my colleague Paul Britt and I detailed in our recent Journal of Indexes piece , these sectors may have much less volatility than sectors like technology and energy, but that may be to your detriment over longer times frames.
If the quest for yield has inflated the prices of companies in these sectors, diminishing their potential to provide adequate risk-adjusted returns over time, then dividend-weighted portfolios will concentrate wealth in these defensive sectors of the economy.
In a falling market, the lower volatility should translate to lower market risk, insulating you from sharp losses. That may be great in theory, but in that same article, we showed how quickly sector correlations can spike in times of market stress.
The inability of defensive sectors like utilities and consumer staples to fully protect dividend investors from market sell-offs makes exposure to more cyclical sectors of the economy all the more important.
In other words, if you lose more than expected in a falling market, it’s all the more imperative that you participate fully in a rising market.
What SDOG does to solve this problem is equally weight the five highest-yielding firms in each of the 10 sectors, providing investors with comprehensive economic cycle exposure—all with the bonus of holding the highest-yielding firms in those sectors.
Of course, no strategy is perfect, and SDOG’s relative underweighting to defensive sectors may prove fatal in the wrong market environment. But it is another tool in the toolbox of advisors, which is usually a good thing.
Given that it has raised more than $50 million in five short months since launch, it seems SDOG is a welcome tool.
With a 4.5 percent dividend yield and a storied investment strategy to fuel marketing efforts, it seems likely that this ETF is going to be around for the long haul.
At the time this article was written, the author had no positions in the security mentioned. Contact Paul Baiocchi at email@example.com.
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