Just because you own a portfolio with a yield ETF doesn't mean
you can sit back and relax. ETF investors, just like stock
investors, need to be diligent and watch for changing market
conditions that will affect the ETF's holdings.
[caption id="attachment_67961" align="alignright" width="300"
caption="Stock brokers working at the New York Stock Exchange,
I continue to stress that you need to know and understand how
each ETF you own is constructed, weighted, and what exposure each
individual stock brings the ETF.
The ETF market has been rapidly growing, to the point of 1,476
ETF funds encompassing $1.2 trillion in assets which makes up
roughly one third of the US equity market. It's a popular vehicle
for retail traders.
With the explosion in ETFs' popularity it's no surprise the hunt
for yield has spilled over to the ETF world as fast as it has;
there's 49 specific dividend-focused ETFs now on the market, up
from 20 yield ETF funds in early 2011.
In fact, one of the key reasons retail investors favor dividend
focused ETFs is that it allows them to own several dividend paying
stocks in one asset for a lot less capital outlay and
This simple fact is both blessing and curse. Yes yield ETF
investors reap the benefit of spreading capital across several
stocks that pay dividends. However, Net Asset Value (NAV) can be
greatly influenced by one or two stocks within an ETF, effectively
wiping out potential dividend gains. This is why it's so important
to truly understand what you own when buying any ETF.
This holds especially true for emerging market investors
looking at focused ETFs. Many investors can hold emerging
market ETFs, including a yield ETF, that may contain equities and
other assets based in more than one country that can have a direct
impact on the ETF -- without realizing before it's too late.
Dividend-focused ETFs may seem an easy way to spread risk
across several equities and reap the benefit of multiple dividends
from one yield ETF. It's definitely alluring, but looks can be
deceiving and you need to be careful of the added exposure that
comes with ETFs. In many cases ETFs add to your
homework work-load as you need to be aware of several
underlying assets to make an informed decision surrounding the
You also need to factor in the ETF's fees versus owning the
shares outright. Many brokers offer a Dividend Reinvestment Plan,
commonly known as DRIP, in which the dividend is deployed into
buying additional shares of the security. The two key factors of
this program: it allows for a fractional share purchase (allowing
100% reinvestment) and any broker worth their salt will NOT charge
a commission for the service.