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Inside the New International Sector Dividend ETF

Although income investing has faced some troubling trading over the past few weeks, many still desire higher yielding securities for their portfolios. Rates still are near historically low levels, and thanks to some sluggish data lately, the tapering of QE may not happen for a little while longer.

Still, risks are somewhat elevated in the bond side of income generating portfolios, leaving many to look at equities for their yield needs. Thanks to this, a number of ETF providers have forged ahead with new equity products that have a focus on the income market (read 3 Red Hot Dividend ETFs).

These funds face significant competition and an uncertain outlook, but thanks to some novelty and unique strategies, these could manage to attract a decent amount of assets anyway. Some of the recent additions in this space include a new covered call ETF from Horizons, and a YieldShares High Income ETF as well, plus an international addition to the group coming to us from ALPS.

This new product from ALPS, the International Sector Dividend Dogs ETF (IDOG), looks to be an interesting play for some globally-minded investors in the income world. The fund seeks to give broad exposure across market sectors and countries to securities with above-average yields.

While this might sound similar to many other dividend-focused ETFs on the market, this dividend dogs fund actually has a few key differences when compared to others in the space. Below, we have highlighted some of these important factors which investors should be aware of before considering a play on this corner of the dividend ETF market:

IDOG in Focus

The new found tracks the S-Network international Sector Dividend Dogs Index as closely as possible before fees and expenses. The product looks to hold about 50 stocks with this approach, and will charge investors 50 basis points a year in fees.

For selection in the index, stocks must first be from a high income country and be in the S-Net International Developed Markets Index. The advisor believes that this technique will reduce the chances of including ‘troubled and financially distressed companies’ and that it ‘allows dividend yield to be the primary selection criterion for the index’.

After this initial screening process has been completed, stocks are then put into one of ten market sectors and ranked by dividend yield. The five highest yielding securities in each sector are then selected for the index and are equally weighted, ensuring a good level of diversification both across companies and sectors (read 4 Excellent Dividend ETFs for Income and Stability).

Still, there is a bit of a concentration from the national perspective, as Japan (18.2%), the UK (12%), and Finland (10%), take the top three spots. A variety of other nations round out the top ten—including Australia and France with weights in excess of 8%-- though more than seven nations receive less than 2.5% of the total portfolio, meaning that there is definitely some geographic concentration.

ETF Competition

The new ETF looks to serve as the international counterpart to ALPS’ SDOG ETF. This fund also uses a ‘Dogs Theory’ allocating big to securities with the highest dividend yields (see ALPS Launches Sector Dividend Dogs ETF).

This type of approach—which is most famous for the ‘Dogs of the Dow’ technique—suggests that stocks with the highest yields are oversold and are due for a bounce. ALPS’ use of this idea goes to sectors instead, taking the highest yielding in each segment, thus hopefully providing investors with both income and price appreciation.

Beyond this domestic ETF, there are several international products which have a focus on high yields. In particular, the SPDR S&P International Dividend ETF (DWX) and the iShares Dow Jones EPAC Select Dividend Index Fund (IDV) stand out as tough competitors.

Both of these products have more than one billion in assets under management, and several hundred thousand shares of volume on an average day. Plus, both have outsized yields, suggesting they could be solid targets for income-focused investors (read 4 International ETFs Yielding more than 5%).

Still, the appeal of the ‘dogs theory’ in sector form could definitely attract a host of income-centric investors, especially those who are looking for strong levels of diversification across sectors. SDOG has already received more than a quarter billion in assets, so there is a decent track record for this strategy, suggesting that the new IDOG could be another poplar product for ALPS in the dividend ETF market.

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