High-dividend ETFs just suffered their worst quarter of relative performance relative to the broader market since the first quarter of 2009. While the SPDR S&P 500 ETF (NYSE:SPY) rose 12.69% in the first three months of the year, the Vanguard Dividend Appreciation ETF (NYSE:VIG) gained 7.65% and the iShares Dow Jones Select Dividend Index Fund (NYSE:DVY) returned just 4.77%.
Does this make the dividend ETFs likely candidates for mean reversion in the quarter ahead, and if so, which of the two is the better bet?
DVY vs. VIG
The two ETFs are close in terms of assets ($10.9 and $10.1 billion for VIG and DVY, respectively), but they are very different in terms of their holdings. While DVY puts a greater emphasis on stocks’ absolute yield levels, VIG is tilted toward those with the potential for dividend growth over time.
DVY, therefore, holds a slightly more eclectic portfolio, and it has a much heavier weighting in the defensive market segments, with 53.3% of its assets in the utilities, telecommunications, consumer defensive and health care sectors. VIG, on the other hand, holds only 33.6% in these areas.
Click to Enlarge The result of these differences is twofold. First, VIG has a lower yield: 2.1% — not much higher than the 1.9% for SPY — compared with 3.5% for DVY. Second, it tends to track the performance of the broader market more closely. In this case, that has proven to be a good thing. Since VIG’s inception on April 21, 2006, it has generated a total return of 30.84% — well ahead of both DVY (+6.51%) and SPY (+20.82%).
Note: These returns don’t correspond to the numbers in the above chart since dividends aren’t incorporated, but the charts still provide an accurate visual representation of the performance gap.
Click to Enlarge Much of DVY’s longer-term underperformance stems from its tilt toward financial stocks heading into the crisis. If you take this out of the equation and look only at the period from March 2009 to the present — also a time in which stocks with high absolute yields have been in vogue — DVY has in fact come out on top.
All factors considered, DVY beats VIG as a proxy for the dividend-stock universe. Its higher yield, lower correlation to the broader market and portfolio structure all indicate that it is a better option than VIG for an investor who wants to isolate the performance of high-dividend equities.