SDOG Looks Great For Retirees Seeking Dividend Yields With Stability
Summary I’m taking a look at SDOG as a candidate for inclusion in my ETF portfolio. The expense ratio is a bit high, but the total returns have been similar to SPY. The dividend yield (3.20%) makes this ETF particularly attractive to retiring investors that want stronger yields. I’m putting SDOG in my list of potential ETFs to use for building my portfolio. I’m not assessing any tax impacts. Investors should check their own situation for tax exposure. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. I’m working on building a new portfolio and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the ALPS Sector Dividend Dogs ETF (NYSEARCA: SDOG ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. What does SDOG do? SDOG attempts to track the total return (before fees and expenses) of the S-Network Sector Dividend Dogs Index. At least 90% of the assets are invested in funds included in this index. SDOG falls under the category of “Large Value”. Does SDOG provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use (NYSEARCA: SPY ) as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. Therefore, I start my diversification analysis by seeing how it works with SPY. I start with an ANOVA table: (click to enlarge) The correlation is about 93% according to the regression. That is low enough that it appears to offer some diversification benefits. Extremely low levels of correlation are wonderful for establishing a more stable portfolio. I consider anything under 50% to be extremely low. However, for equity securities an extremely low correlation is frequently only found when there are substantial issues with trading volumes that may distort the statistics. Standard deviation of daily returns (dividend adjusted, measured since January 2013) The standard deviation is great. For SDOG it is .6611%. For SPY, it is 0.6851% for the same period. SPY usually beats other ETFs in this regard, so a lower volatility level is very impressive. Because the ETF has fairly low correlation for equity investments and a low standard deviation of returns, it should do fairly well under modern portfolio theory. Liquidity looks fine Average trading volume is high enough for me, a bit over 140,000. Mixing it with SPY I also run comparisons on the standard deviation of daily returns for the portfolio assuming that the portfolio is combined with the S&P 500. For research, I assume daily rebalancing because it dramatically simplifies the math. With a 50/50 weighting in a portfolio holding only SPY and SDOG, the standard deviation of daily returns across the entire portfolio is 0.6608%. With 80% in SPY and 20% in SDOG, the standard deviation of the portfolio would have been .6726%. If an investor wanted to use SDOG as a supplement to their portfolio, the standard deviation across the portfolio with 95% in SPY and 5% in SDOG would have been .6816%. Why I use standard deviation of daily returns I don’t believe historical returns have predictive power for future returns, but I do believe historical values for standard deviations of returns relative to other ETFs have some predictive power on future risks and correlations. Yield & Taxes The distribution yield is 3.20%. That appears to be a respectable yield. I’m quite happy with the yield and the strong yield makes this fund worth considering for retiring investors that plan to live off the yield. I prefer a strong dividend yield to “creating your own dividends” by selling shares because one of the reasons for ETF investing is that it removes the human emotions. There is less temptation to freak out and sell when the market is down if the investor is simply living from the dividends and doesn’t need to check in on the portfolio. I’m not a CPA or CFP, so I’m not assessing any tax impacts. Expense Ratio The ETF is posting .40% for an expense ratio (net and gross). I want diversification, I want stability, and I don’t want to pay for them. The expense ratio on this fund is higher than I want to pay for equity securities, but not high enough to make me eliminate it from consideration. I view expense ratios as a very important part of the long term return picture because I want to hold the ETF for a time period measured in decades. Market to NAV The ETF is at a .05% premium to NAV currently. Premiums or discounts to NAV can change very quickly so investors should check prior to putting in an order. The ETF is large enough and liquid enough that I would expect the ETF to stay fairly close to NAV. Generally, I don’t trust deviations from NAV and I will have a strong resistance to paying a premium to NAV to enter into a position. Largest Holdings The diversification within the ETF is mediocre. The top 10 are all over 2%, which isn’t terrible but feels pretty weak for an ETF with an expense ratio of .40%. What exactly are investors receiving for that expense ratio? The best argument for accepting the expense ratio, in my opinion, is that the dividend yield may be strong enough to keep people from selling their shares when the market is down. If the strong dividend yield can convince casual investors to avoid human errors, then the expense ratio is a fine price to pay. (click to enlarge) Conclusion I’m currently screening a large volume of ETFs for my own portfolio. The portfolio I’m building is through Schwab, so I’m able to trade SDOG with no commissions. I have a strong preference for researching ETFs that are free to trade in my account, so most of my research will be on ETFs that fall under the “ETF OneSource” program. The best part is clearly the dividend and the worst part is the expense ratio. For someone that is living off the yield and trying to keep their hands off the investment, SDOG is a very viable option. The reasonable level of liquidity is a huge benefit if a life event forces the shareholder to sell, but the strong dividend yield should reduce the temptation to mess with the account. I’m going to keep SDOG in my list of contenders for a spot in the portfolio. I intend to allocate part of the portfolio to an ETF that is similar to SPY but with an emphasis on stronger dividends. SDOG will be competing with other ETFs like (NYSEARCA: SCHD ) for that role. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.
