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Watch the Fees on Dividend ETFs


Exchange traded funds with an emphasis on dividends have become increasingly popular. At one point last year, combined assets under management at dividend ETFs were larger than that of the assets held by U.S. Treasury ETFs.

Not to mention dividend ETFs contributed a substantial portion of the growth experienced by smart beta or intelligent index ETFs. [Bright Future Seen for Smart Beta ETFs]

But all dividend ETFs are not created equal and some sport higher expense ratios that can erode yields and total returns. Cost-conscious income investors need to be aware of this scenario with ETFs such as the $811.6 million First Trust Value Line Dividend Index Fund (FVD).

FVD debuted in August 2003, making it one of the oldest dividend ETFs on the market, but the fund remains expensive compared to its rivals.

“It was one of the very first dividend ETFs to hit the market, and its strategy has performed very well over the years (its historical performance was good enough to win it a 5-star Morningstar rating)–but its 0.70% expense ratio, a relic of the days before the ETF price wars, is the highest among dividend ETFs today,” writes Morningstar analyst Abby Woodham.

While FVD’s expense ratio is high, Morningstar notes the ETF’s “strategy is worth close consideration, but investors must consider whether it’s worth the price tag.”

FVD’s 170 holdings are pulled from a universe of stocks that have rankings of 1 or 2 in the Value Line Safety Ranking System. From there, Value Line “selects those companies with a higher than average dividend yield, as compared to the indicated dividend yield of the Standard & Poor’s 500 Composite Stock Price Index,” according to First Trust.

As is the case with rival funds, FVD, which has a trailing 12-month distribution rate of 2.25%, is heavy on utilities and consumer staples names. Those sectors combine for 41.5% of the ETF’s weight and that could leave FVD vulnerable if interest rates rise. FVD is up 16% in the past year assuming dividends were reinvested. [Rising Rates Hurt Some Dividend ETFs]

Lower fee dividend ETF options include the Vanguard Dividend Appreciation ETF (VIG) . The largest U.S. dividend ETF by assets charges just 0.1% per year while the rival Schwab US Dividend Equity ETF (SCHD) charges just 0.07%. First Trust also offers dividend ETFs with lower fees than FVD, including the new First Trust NASDAQ Rising Dividend Achievers ETF (RDVY) . RDVY charges 0.5% per year.

First Trust Value Line Dividend Index Fund


ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of SCHD.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.