, we wrote about the SPDR S&P Dividend ETF (). SDY is just one of the dividend funds we use in the iSectors and Allocations. We recently implemented a few other large-cap style dividend funds to complement SDY (and the First Trust Value Line Dividend ETF, , our other large-cap dividend fund). Over the next few weeks we will write a few different posts on each of these dividend ETFs.
First, however, I’d like to reiterate why iSectors tilts our equity portfolios toward dividends instead of growth, core, value, etc. iSectors believes in the research that over time dividend stocks outperform growth and value stocks with less volatility. Over the past few years, growth has outperformed dividend stocks, but taking longer time periods into consideration (10+ years) dividend stocks’ risk/return profiles will be more attractive than growth or value stocks. Taking this view on dividend stocks into consideration is the reason that all of our equity portfolios are weighted over 50% in dividend funds.
Given this heavy weighting to dividends, this year we were looking to further diversify our large-cap dividend ETF offerings. We had been sticking with some of the “old guards” in the space; funds that have been around for more than 10 years. However, with all of the innovation that has occurred in the ETF space over the last few years, there were just too many good options to leave some of them out of the portfolio.
One of the “newer” funds we implemented is the ProShares S&P 500 Dividend Aristocrats ETF (). This fund is very similar to the previously mentioned SDY, but there are a few distinctions that have resulted in slightly different return profiles over the past 5 years. Recently SDY has outperformed, but over the entirety of the 5 years, NOBL has looked better both on an absolute return and on a risk/return basis.
The differences between SDY and NOBL begin with the base selection universe. SDY utilizes the S&P 1500 Index, while NOBL begins with the S&P 500 Index. Right out of the gate, this means that NOBL will tilt more towards large-cap securities than SDY.
Another distinction is how “aristocratic” each fund is. What I mean by this is that both funds have different thresholds in regards to how many years a company must have increased its dividend to be included in the fund. SDY only requires 20 straight years of rising dividends, while NOBL requires 25 years. An extra 5 years may not seem like much of a difference, but it’s enough to create materially dissimilar sector allocations in each fund.
The last notable difference between the two funds is the weighting methodology. SDY uses the more “traditional” weighting method used by dividend ETFs: dividend weighting. NOBL on the other hand equal weights its constituents. The equal weighting for NOBL helps to smooth out the large-cap bias that is naturally present in the fund.
Given the slight differences between these two funds, we were not comfortable completely replacing SDY with NOBL. We decided, instead, to equal weight the entire large-cap dividend ETFs network of holdings. I will give an update on some of these new large-cap dividend ETFs in the coming weeks. Stay tuned!