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DLN: A Perfectly Adequate Dividend ETF

Summary DLN offers a dividend yield of 2.74%. It’s acceptable, but nothing to write home about. The top several holdings are a mix of established dividend champions, except for the allocation to Apple which is really hanging on the company paying out their cash. The ETF has a moderate expense ratio, but there are so many options I’ve seen lately with ratios that are excellent. I’d really prefer to see consumer staples as an overweight allocation or a higher allocation to utilities. The WisdomTree Largecap Dividend ETF (NYSEARCA: DLN ) looks quite adequate. Ironically, there seems to be no better way to sum up the fund in a single sentence. Expenses The expense ratio is a .28%. When it comes to investing, who wants to throw away their capital on high expenses ratios or trading costs? This is fairly middle of the road for expense ratios in my estimation, but there have been quite a few funds coming up lately with expense rates that are downright excellent. Dividend Yield The dividend yield is currently running 2.74%. That isn’t too bad if the universe of comparable securities is all ETFs, but as far as dividend ETFs go this is running a bit low. Based on current valuations throughout the industry I would expect to see dividend ETFs running closer to 2.9% with some high yield dividend ETFs exceeding 3.5%. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: (click to enlarge) Apple (NASDAQ: AAPL ) being the top holding makes sense for an ETF that wants to more closely track the market since Apple is such a large part of the market. They certainly have the cash to pay out great dividends but a yield below 2% doesn’t seem like a great fit for the top holding in a dividend ETF. I love seeing Exxon Mobil (NYSE: XOM ) as a top holding. Investors may be concerned about cheap gas being here to stay, but I think money in politics will be around decades (centuries?) longer than cheap gas. Bet against big oil at your own peril. I can say the same about liking Chevron (NYSE: CVX ) as a top holding. These companies offer investors a good way to benefit from high as prices which would generally be a drag on the rest of the economy and on their personal expenditures. Seeing AT&T (NYSE: T ) and Verizon (NYSE: VZ ) with heavy weights is one area where I tend to feel conflicted. The dividend yields are great but the sector is becoming more competitive. On the upside any technology that actually makes them obsolete or at least incapable of growing earnings would be indicative of the investor having a lower cell phone bill, so there is another benefit to aligning the portfolio to match an investor’s individual expenditures. Honestly, is there any better way to pay your phone bill than with a dividend check from the phone company? This is a difficult one to come down on because I love the strategy of covering a cost with dividend income from the company, but I’m also concerned that Sprint (NYSE: S ) is offering a very viable competitive product. Their reception may be terrible in some cities, but they are great in Colorado Springs. Johnson & Johnson (NYSE: JNJ ) is another great dividend company to hold. They have an effective R&D team and a global market presence. Sectors (click to enlarge) The sector composition is fairly balanced. On one hand, a balanced portfolio seems positive. However, I think it comes down to the individual investor. I have more risk tolerance than many investors because I have a fairly long time to recover from negative events, but my portfolio is also missing traditional bond exposure so I tend to prefer the less risky equity allocations. That puts me in a position to favor consumer staples, equity REITs, energy (only in the context of large companies like XOM), and utilities. Occasionally equity REITs are included in the “financials” category, but I’d rather get my REIT exposure through a separate ETF because I want to shove all my REITs into tax advantaged accounts. Therefore, I tend to use large equity REIT allocations in those accounts and would prefer a dividend champion ETF to be underweight on equity REITs. When “financials” simply means banks, then I prefer to see the allocation limited to around 10 to 15% of the portfolio. This allocation is reasonable as a balanced portfolio, but I would really rather see information technology swapping place with utilities and wouldn’t mind seeing financials trade place with either health care or energy. I think those areas offer investors a safer income stream as it relates to the expenses they will face in their life. What to Add Clearly my first area to increase the allocations would be utilities or consumer staples. The utilities offer investors a solid dividend yield while being moderately correlated with interest rates which allows them to serve a purpose that is somewhat similar to bonds in the portfolio while still having the dividend income grow over time. The consumer staples allocation is already almost 15%, but I’d rather see it running closer to 20%. For my risk tolerance, I wouldn’t mind seeing it be even more overweight. Conclusion This is a fairly interesting fund in that it doesn’t stand out from the crowd, but it also doesn’t make have any glaring problems. Overall, I’d have to say that it is perfectly adequate but nothing that really gets me excited. This seems to be a dividend growth fund that just tries to remain reasonable. That makes it an acceptable investment for many investors but it doesn’t stand out as being anything great for my desired allocations.

5 Best Performing Stocks of October

Markets posted their best monthly performance in four years in October. Stocks recovered from their deepest correction, also in four years, in August to post strong gains. Investors largely ignored weak economic data to focus on positive external signals.

Why Invest In Emerging Market Small Cap Stocks?

Summary The notion of a “small-cap premium” is deeply established in investors’ consciousness. Many investors include an explicit allocation to U.S. and international small-cap stocks in their portfolios in order to benefit from the implied outperformance of this market segment. Recently there has been a growing interest in whether making a similar allocation to emerging market small-cap stocks can be beneficial. We detail the motivations of EM small cap investors and whether empirical evidence supports those motivations. By Tim Atwill, Ph.D., CFA, Head of Investment Strategy and Mahesh Pritamani, Ph.D., CFA, Senior Researcher An investor in emerging market small-cap stocks typically has three main motivations behind their interest in the asset class: presumed higher return; better diversification with their developed equity allocation; and more “focused” exposure to the emerging markets, in that small-cap companies tend to be more domestically focused in their economic activities. Below, we lay out the empirical evidence which supports these motivations. We show that while the return advantage and “pure exposure” arguments are strongly supported, the diversifcation benefit is relatively modest. HIGHER RETURNS Historically, small capitalization stocks have been seen as having higher potential returns than mid- and large-cap stocks. However, the bulk of the research examining this premium has focused primarily on the U.S. markets, and, to a lesser extent, the international markets. Below, we compare the excess returns of the MSCI® Emerging Markets Small Cap Index to the MSCI Emerging Markets Index to evaluate whether a similar small-cap premium exists in emerging markets. (click to enlarge) Figure 1 shows that in most years, small-cap stocks earn a relative premium to large- and mid-cap stocks. However, as with most matters in investing, there is no such thing as a free lunch, and several years had notable underperformance. Moreover, the oversized small-cap premium in 2009 highlights the timing risk associated with trying to capture the small-cap premium. This is also evident in Figure 2 which shows the annualized small-cap premium on a rolling 3-year basis, where the realized premium ranges from -5.4% to 9.2%. (click to enlarge) These results indicate that although there is evidence of a small-cap premium in the emerging markets, one has to be invested for the long-term in order to earn it. LOWER CORRELATION WITH DEVELOPED ECONOMY EQUITIES Many argue that small-cap companies are more focused on their local economies, and because of this are less connected to the global economy. Accordingly, such small-cap stocks should provide higher diversification benefits within an investor’s portfolio, versus the benefit from buying equities of larger, more globally-focused companies, which are included in more traditional emerging markets equity allocations. To demonstrate the diversification benefits associated with investing in emerging market small-cap stocks, we calculate the correlation of the MSCI World Index (which represents the equities of the developed markets) to the MSCI Emerging Markets Index, as well as the MSCI Emerging Markets Small Cap Index. (click to enlarge) As can be seen, emerging market small-cap stocks have historically shown a modestly lower correlation with the developed markets than large and mid-cap emerging market stocks. That is to say, emerging market small-cap stocks should provide a higher degree of diversification if included in an investor’s portfolio. Moreover, Figure 3 shows that this diversification benefit persists over most time periods. Therefore, a portfolio which includes an allocation to emerging market small cap stocks should expect to achieve some minor benefits from this lower correlation, including lower predicted portfolio volatility versus a similar portfolio which only includes large- and-mid-cap emerging market stocks. A “FOCUSED” EMERGING MARKETS EXPOSURE One of the reasons for investing in emerging markets, in general, is to gain exposure to smaller, less developed economies which have the potential to grow at a faster rate than developed economies. However, given the globalization of the world economy, several emerging market countries now have a small number of companies that are global in nature and known worldwide. A prime example of this is Korea-based Samsung, a truly global company, whose consumer products (such as TVs and smart phones) are bought all over the world and whose profitability is more likely tied to the world economy than the local Korean economy. A portion of the MSCI Emerging Markets Index constituents is in such global companies, under-cutting to some degree this motivation for investing in the emerging markets. By avoiding such companies, an investor in the small-cap segment of the emerging markets has the potential to obtain an exposure more focused on the local emerging market economies. To quantify this, we look at each company within both the MSCI EM Small Cap Index and the MSCI EM Index, and calculate the percentage of revenue which comes from outside its “home” country. We then capitalization-weight these percentages for each index, and present the results below. (click to enlarge) As shown in Figure 4, emerging market small-cap companies do receive much less of their revenue from outside their home economies (approximately one-quarter, versus almost one-third for large/mid-cap stocks). In addition, this focus on local economies remained relatively static over the past decade, while globally, small-cap companies saw growth in foreign revenues. This data suggests that an investor in the small-cap segment of the emerging markets captures a “focused” exposure to the local emerging market economies, because small-cap names are generally more reflective of local economies, and that this focus is more persistent than is observed globally. CONCLUSION Investors currently hear many arguments for investing in emerging market small-cap stocks, and while these arguments appeal to intuition, we have found varying degrees of support for them in the historical data. After exploring the three most common reasons for investing in the emerging market small-cap stocks – earning a small-cap premium, realizing the benefits of increased diversification, and achieving a more focused exposure to the local economies in emerging market countries – we find supporting evidence for all three of these arguments. One can potentially earn a small-cap premium by investing in small-cap stocks, though there is the risk that small-cap stocks will underperform large- and mid-cap stocks over multiple years. Historical evidence also demonstrates that although emerging market small-cap stocks are less correlated with the developed markets, this diversification benefit is relatively modest in size. It also appears that small companies in the emerging markets are more focused on their local markets, and so are potentially well positioned to benefit from the higher expected growth rates in these developing economies. All in all, we find the data encouraging for those investors who are considering a long-term strategic allocation to emerging markets small-cap stocks.