A popular investment strategy that usually comes around when the calendar is getting ready to flip is the “Dogs of the Dow,” which invests in the 10 highest-yielding stocks in the Dow Jones Industrial Average. It’s a value play using individual securities, but there is a way to trade this concept using exchange-traded funds.
To find unloved ETF mutts, screen for funds that experienced significant year-to-date drops in value and those which have been persistent losers over time, says Martin Small, head of U.S. iShares ETFs for BlackRock.
“For the most part, people used fund screeners as a way to find a particular investment sector, or maybe look at the expense ratio of the investments," he says. "I think screeners can be a terrific source of idea generation for any independent enthusiastic, active investors looking for ways to identify where there are value-oriented investments to be had.”
He likes to look at the year-to-date price fall, as well as an ETF’s return over a one-, three- and five-year timeframe. That can give investors a clue whether the break is just a temporary dip and a potential buying opportunity, or if it’s a pervasive repricing in a given sector or industry, Small says.
Screeners won’t tell investors whether or not the worst-performing ETFs are buys, Small adds, but offers a starting place for investors to do research.
And that’s where the “Dogs of the Dow” theory using single stocks deviates from using it as an ETF strategy. When using single equities, investors may rebalance annually, but the ETF story may play out over a longer time period, so an investor may need to stomach some losses if they think they’re buying deep value.
Or as Small puts it: “Don’t just ask, ‘How much is that dog?’ Think about how long it may take to get him trained.”
Small says he has used this strategy in his personal account, and gave two examples of how trades worked for him. In the beginning of the year he bought the iShares 0-5 Year High Yield Corporate Bond ETF (SHYG), thinking its decline was overdone compared to the decline in the iShares iBoxx $ High Yield Corporate Bond ETF (HYG).
“The magnitude of that differential seemed unreasonable to me, so I bought our short high-yield ETF in my personal account, and that proved to be a good trade over the course of 2016,” he said.
He’s been less pleased with the performance of the iShares U.S. Technology ETF (IYW), which he bought last year. While it’s been an “OK” trade for his personal account, “it didn’t perform exactly the way I wanted,” he adds.