Why Are Dividend ETFs So Popular? Yield Power

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Income investors are zeroing in on a new target: dividend funds.

Four of the top 10 exchange traded funds searched on research firm XTF's website on Wednesday were dividend focused. Three of these have topped searches on for the past month.

That makes perfect sense to Todd Rosenbluth, director of fund research at S&P Capital IQ.

"The falling bond yields as of late is driving people to look for alternatives," he said. The yield on the benchmark 10-year Treasury note fell by 1,340 basis points in the past month, including a brief jarring plunge below 2% on Oct. 15.

With 10-year Treasury yields now at 2.2%, Rosenbluth says investors are opting for dividend funds that often offer a better yield.

The recent stock market volatility also spooked investors, says Taylor Gang, a principal at Evenksy & Katz/Foldes Financial, which manages $1.6 billion in assets.

"They may view dividend ETFs as a safe haven," he said. Stocks that pay dividends tend to offer more downside protection than stocks that don't.

But with more than 30 dividend-focused products to choose from, experts advise investors to peek beneath the ETF wrapper to ensure the dividend style is what they seek.

"It matters what someone's views (on the markets) are," Rosenbluth said.

Which Dividend ETF?

Dividend ETFs focused on above-average yields may make sense for those who believe the recent market choppiness is likely to persist, Rosenbluth adds.

For example, $4.5 billion iSharesCore High Dividend ( HDV ) invests in defensive sectors such as telecom and utilities, which do better during pullbacks. It yields 3.2% -- higher than SPDR S&P 500's ( SPY ) 1.9%.

For investors who believe the recent market turmoil was a blip and the U.S. economy remains strong, Rosenbluth advises ETFs focused on companies with a history of growing dividends.

The $19 billionVanguard Dividend Appreciation ( VIG ), for example, invests in economically sensitive sectors such as industrials and technology. It yields 2% -- about the same as SPY -- while investing in high-quality companies that have raised their dividends in each of the past 10 years.

VIG has gained 3% this year vs. an 8% rise for HDV and 7% for SPY. The two dividend ETFs' respective exposures explain in part why VIG underperformed the market, while HDV outperformed, Rosenbluth says.

VIG's criteria that holdings have at least 10 straight years of dividend growth eliminates some fundamentally sound companies with stocks that have outperformed the market recently and that populate HDV holdings.

Keep An Eye On Them

"Investors need to continually review what's inside," Rosenbluth advised, adding that dividend ETFs often will lag in bullish markets, whereas companies that do not pay dividends lead.

Gang does not use dividend ETFs in client portfolios now. "We have been focused on low-volatility as opposed to dividends," he said, adding, "We are already somewhat overweight" in value companies, which typically pay high dividends.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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