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Do ex-Financial Funds Make Safer Dividend ETFs?

Eric Dutram

Financials firms on both sides of the Atlantic appear to be facing some serious trouble. Banks in Europe are under pressure due to a variety of PIIGS debt issues, any of which could cause a disaster for the broad sector if left untreated or unresolved.

Meanwhile in the U.S., investors have to watch out for more regulation, especially in the case of the return of Glass Steagall and the Volcker Rule. Beyond these questions, many of the banks seem to be unmanageably large—as evidenced by the recent JP Morgan trading fiasco—while a host of banking downgrades hasn’t helped matters either.

Thanks to these issues, the financial sector’s outlook—barring a few exceptions—is pretty negative and could stay that way for quite some time. This could be especially true if Europe continues to remain uncertain or if the American economy falls back into a rough spot (read Three Financial ETFs that Avoid Big Bank Stocks).

Despite this troubling cloud over the sector, many investors do like to stay allocated to these companies due to the impressive yields that many of them throw off on a regular basis. For example, financial institutions such as JPM, the Royal Bank of Canada (RY), and Credit Suisse (CS), all are current sporting yields that are well above the yearly rate being paid by 30 Year U.S. Treasury bonds at this time, making them crucial parts of a dividend-focused portfolio.

Obviously, this can be an unfortunate situation, especially when financials are struggling or could be under pressure in the near term, much like they are now. As a result, many dividend-focused investors are heavily allocated to financials, especially in the case of dividend focused ETFs (see 11 Great Dividend ETFs).

In fact, some of the most popular ETFs that arguably have a dividend focus, such as the SPDR S&P Dividend ETF (SDY) and the Vanguard High Dividend Yield ETF (VYM), allocate a double digit weighting to the financial sector, suggesting that those with broad exposure to the market are likely heavily concentrated in financials even when they might not want to be.

Luckily for investors, there are actually a few products that have a dividend focus without the influence of financial companies. These ETFs, both from WisdomTree, take an ex-financials approach, giving investors who are concerned about the banking industry a way to capture yield while still avoiding some of the issues plaguing that particular sector (Read Looking For Income? Try High Yield Muni ETFs).

However, the ex-financials focus may not be for everyone and instead puts a concentration in different sectors, some of which may not be appropriate for all investors. Still, it is an intriguing strategy for those seeking new ways to obtain yield which is why we have highlighted both of the funds occupying the space below in order to discuss how they stack up against the rest of the competition in the dividend ETF market:

WisdomTree International Dividend ex-Financials Fund (DOO)

This ETF could be an interesting choice for investors looking for broad international exposure without the influence of financials. The product tracks the WisdomTree International Dividend ex-Financials Index, giving investors exposure to about 90 companies in total while charging 58 basis points in fees.

This approach leads to an ETF that is heavily weighted towards telecom (18%), utilities (14%), and industrials (11%).  European assets make up about 70% of the total, while the Asia-Pacific region also has a high level of representation thanks to double digit Australia and Japan weightings (see Five ETFs to Buy in 2012).

Currently, the product pays out a robust 5% yield in 30 Day SEC terms, higher than many government bond funds. However, this has not saved this from significant volatility as of late as the product has lost about 6.5% so far in 2012.

WisdomTree Dividend ex-Financials Fund (DTN)

For an American-focus on high yield, investors can certainly take a closer look at DTN in order to avoid financials. The product tracks the WisdomTree Dividend ex-Financials Index which gives exposure to about 90 stocks while charging 38 basis points a year in fees.

Top sectors in this product go towards utilities (14%), consumer staples (13%), and basic materials (11%) while large caps make up nearly 75% of the total. Volume is pretty robust on the fund, coming in at about 187,000 shares a day while AUM is impressive at just over $1 billion.

Currently, this ETF has a 30 Day SEC yield of 4.1%, while paying out a distribution yield of 3.5%. Much like its counterpart, the last few weeks has been rough, although the product has done better than the international version, adding about 5.6% in year-to-date terms.


If one takes DTN and DOO and compared them to their WisdomTree counterparts—DTD and (roughly) DOL—an interesting trend emerges. Somewhat surprisingly, the funds that include financials have actually outperformed their exclusionary counterparts by a relatively wide margin over the past six month period:

Furthermore, dividend yields are comparable among the two product types, although it should be noted that the ‘regular’ ETFs do beat their ex-dividend brethren by a few basis points in terms of cost. Still, this has been hardly enough to make up for the outperformance in the short term, or even during longer time frames like the trailing 52 week period (see Can You Beat These High Dividend ETFs?).

So while the ex-dividend approach may sound appealing in these uncertain times—and it very well could be in the near future if banks collapse—it has not outperformed in the recent time period. Perhaps, if anything, the mood in the financial sector doesn’t really reflect the recent past and that financials are actually an important part of a dividend focused portfolio even if there have been a few scares as of late.

Clearly, whatever troubles are impacted the financial space are hitting the other corners of the economy just as hard, if not more so. Given this, it may not be wise to consider an ex-financials approach to dividend ETF investing at this time, assuming of course that the recent trend in the space holds up in the second half of the year.

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