The fourth fund, the ALPS Sector Dividend Dogs ETF (SDOG), tracks the S-Network Sector Dividend Dogs Index, an equal-weighted index of the five highest-yielding S&P 500 securities in each sector. While it might have the word “dogs” in the name, SDOG only has three dogs in its top 10 holdings, and it holds 52 stocks in total. It has $1.9 billion in AUM and an expense ratio of 40 basis points. The distribution yield is 3.85 percent. SDOG has the best year-to-date return of the four ETFs, up 5.4 percent. It has a one-year annualized loss of 10.5 percent, but a three-year return of 11.5 percent and a five-year return of 7.7 percent.
Manning says these “dogs” ETFs show why advisors need to look further into holdings and not necessarily just buy based on a name. He also questions whether having more diverse holdings, normally a benefit of ETFs, ends up hurting the strategy.
“If you start to extrapolate this out to large caps in general, you completely miss the point,” he said.
While the dogs strategy generally works because the DJIA is based on companies that are supposed to be structurally important to the U.S. economy, sometimes the strategy might falter, Manning adds. For example, GE was one of last year’s dogs and dragged down the group's performance. The stock was eventually kicked out of the Dow.
“GE is an example [of what] once in a while hurts this theory,” he notes. “GE is no longer structurally important. But for the most part, undervaluation in that set of stocks should be an advantageous entry point.”