Since the financial crisis, investors have frequently heard that buy-and-hold investing is dead. At the same time, dividends have taken on increased importance in portfolios. Simple math dictates that in order for investors to gain the maximum benefit from dividend stocks and ETFs, those vehicles cannot be traded as short-term trades.
The performance of several marquee dividend ETFs this year reminds investors that these funds, and the stocks held by them, are most potent over longer time horizons. This is the reality of plenty of noteworthy dividend ETFs in 2012: Many are seeing impressive inflows, but are still lagging broader market funds. That is the case even when accounting for dividends paid.
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All this while the amount of dividends on a monthly basis set a record at $34 billion in August.
Even some ETFs tracking sectors known for being home to prodigious dividend payers have had problems significantly outpacing the SPDR S&P 500 (NYSE:SPY). The Health Care Selector Sector SPDR (NYSE:XLV) and the iShares Dow Jones U.S. Telecommunications Sector Index Fund (NYSE:IYZ) have outpaced SPY by 300 and 420 basis points, respectively, when accounting for paid dividends. Conversely, the Consumer Staples Select Sector SPDR (NYSE:XLP) trails SPY by 360 basis points year-to-date and the Utilities Select Sector SPDR (NYSE:XLU) is behind SPY by 950 basis points.
Not Just Sector Funds Sector funds known for being home to solid dividends and decent yields are not the only dividend-based ETFs trailing the broader market this year. More importantly, it is those funds with "dividend" in the names that are relative laggards.
Take the example of the Vanguard Dividend Appreciation ETF (NYSE:VIG), the largest dividend ETF by assets. VIG is up nine percent this year with dividends paid, but to get that return, investors have had to deal with 11.5 percent volatility, according to ETF Replay data. SPY has offered 540 basis points more in return with just another 120 basis points in volatility.
It is not fair to solely pick on VIG, though. The average year-to-date return for the SPDR S&P Dividend ETF (NYSE:SDY), the iShares High Dividend Equity Index Fund (NYSE:HDV) and the Schwab Dow Jones U.S. Dividend Equity ETF (NYSE:SCHD) is 10.7 percent.
The reminder that ETFs such as these are long-term plays comes when looking at the three-year returns against SPY. In this case, HDV and SCHD were dropped because neither is three-years-old and the WisdomTree Total Dividend Fund (NYSE:DTD) was added. Since October 23, 2009, DTD, SDY and VIG are up an average of 41.7 percent with dividends paid. That tops the S&P 500 by 270 basis points and all three ETFs have been less volatile than SPY over that time.
Sectors Winning In 2012 Matching up four select sector SPDRs and IYZ against the aforementioned dividend funds on a year-to-date basis proves interesting as well. The four SPDRs chosen were XLP, XLV, the Financial Services Select Sector SPDR (NYSE:XLF) and the Technology Select SPDR (NYSE:XLK). XLF and XLK were chosen because the sectors tracked by the ETFs have been the primary drivers of dividend growth in the U.S. this year. Technology and financial services are also the largest sector weights in the S&P 500.
Given VIG's low weights to financials and technology (just over six percent in both cases), it is not surprising XLF has blown that fund away this year. However, XLF is up 23.3 percent year-to-date, meaning it trounces a lot of ETFs out there.
Again, it is not fair to pick on just VIG. Neither, HDV nor SCHD have anything more than scant allocations to financials and technology issues and that is a large part of the reason these ETFs have lagged XLF and XLF.
Emerging Markets, Too Emerging markets are getting on the dividend action, too. Earlier this year, UBS said the 300 largest non-financial firms in the MSCI Emerging Markets Index are expected to pay $52.2 billion in dividends in 2012, up from $48.9 billion last year.
That is solid growth on a year-over-year basis, but the numbers indicate the emerging markets dividend theme will take a while to mature. Translation: Emerging markets dividend ETFs are long-term investments, too, and that much is highlighted by the year-to-date returns.
Take the WisdomTree Emerging Markets Equity Income Fund (NYSE:DEM), an ETF that has more than doubled in size this year. When accounting for paid dividends, DEM has lagged the Vanguard MSCI Emerging Markets ETF (NYSE:VWO) by 240 basis year-to-date, according to ETF Replay data.
The same trend is spotted at the small-cap level where the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSE:DGS) has lagged the SPDR S&P Emerging Markets Small Cap ETF (NYSE:EWX) by a wide margin this year.
As is the case with U.S.-focused dividend ETFs, stretch the time frame out for emerging markets dividend ETFs and the result is superior returns. Over the past 36 months, DEM and DGS are up 22.4 percent and 22.8, respectively. VWO and EWX are up 9.2 percent and 6.3 percent. DEM and DGS have also been less volatile over that time than VWO and EWX.
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