Many funds have dividend yields between 3% and 4%, about double the S&P 500’s trailing 12-month yield of 1.6%. While the 10-year Treasury note yields over 3% as well, “until the Fed cools off, the bond market is going to be a tough place,” said Balchunas. “We’ve seen it in mutual fund flows with older investors bailing. That will be a constant drain on the prices of bonds for the foreseeable future.”
The yields offered by high-dividend ETFs may be similar across funds, but they vary greatly in how they find that yield. The Vanguard High Dividend Yield ETF holds about 440 stocks and tracks the FTSE High Dividend Yield Index, which is made up of US companies (excluding real estate investment trusts) that have paid above-average dividends for the previous 12 months. The SPDR Portfolio S&P 500 High Dividend ETF, meanwhile, homes in on 80 of the S&P 500’s highest-yielding companies.
The ETFs also weight their portfolio companies differently, which can dilute or amp up concentration. Some weight by market cap, some weight every stock equally, and some weight based on dividends. In WisdomTree’s ETF, for example, which focuses on the highest dividend yields, Exxon Mobil has a 7.3% weight, while it is a much more tame 2.8% in Vanguard’s market cap-weighted fund.
“If a fund weights by dividends you clearly are going to have some stocks that dominate, and that can be a little scary, because yes, this thing yields a lot but now it’s really controlling your fund,” said Balchunas. “Some investors would likely opt for the equal-weighted version on these funds.”
This article was provided by Bloomberg News.