Dividend ETFs drive growth in Smart Beta

YETF Focus ields have been on an upward march since Donald Trump’s election, and with a likely hike to the Fed funds rate coming in March, that trajectory is expected to continue.

Relatively speaking, however, yields remain generally paltry in the world of bonds.

It is no surprise then to find that dividend ETFs have been at the forefront of growth in the factor-based ETF sector — also known as Smart Beta.

Overall, the category now accounts for more than $10 billion in assets.

At various times, observers have warned about stretched valuations and the potential risks in store for investors should yields continue to rise.

But that hasn’t slowed the growth of dividend ETFs. There are 11 that have enjoyed growth well in excess of $100 million on a year-over-year basis, reflecting both positive price performance, as well as strong sales (see table).

These main 11 ETFs command more than 75 per cent of assets in the category, which included more that 50 ETFs in total.

From a provider’s perspective, cracking the ranks of the “go to” ETFs in a given category can be a huge challenge.

But that doesn’t necessarily mean that smaller funds underperform in comparison to the “go to” lot.

Keeping in mind that past performance, as the disclaimer goes, isn’t indicative of future performance, a look at the numbers shows that you could have done well with a number of smaller dividend ETFs.

In fact, you probably would have done well with dividends as a theme even if, a year ago, it was already seen by some as a “crowded trade”. Looking at the trailing three-month numbers, what also stands out is that you’d have done well with them as plays on the “Trump bump” — even if, they remain potentially vulnerable to this year’s U.S. Fed rate hike cycle.

As for their dividend yields, what is there to know? That they aren’t created equal: Aside from the obvious difference that Canadian stock funds enjoy a dividend tax credit boost, other things to watch for is that some focus on a basket of the highest yielding stocks, while others look for companies that have exhibited a strong ability to grow their dividends through time.

Beyond this, you must also consider their sector representation (some of the Canadian equity ETFs, for instance, have large financial sector exposure) as well as whether a CAD currency hedge (aimed at removing their foreign currency risk) is something for you or not.

All of these criteria, at the end of the day, will determine how well you will do going forward.