Eric Dutram: While many small ETF issuers have had great success breaking into the industry, a few have had a more difficult road. ALPS, a Denver, Colorado based firm has certainly had a hard path to say the least as it has seen mixed results for many of its funds.
The company has seen some flops as of late, such as the soon to be shut down Wildcatters ETF (NYSEARCA:WCAT) from index provider Jefferies, coming shortly after the company shut down two other funds from the provider at the end of 2011. However, there have been huge successes as well, most notably in the case of the Alerian MLP ETF (NYSEARCA:AMLP).
This extremely popular fund has managed to amass over $3 billion in AUM for the firm, making it the second most popular MLP exchange-traded product and by far the most popular one that is structured as a fund instead of an ETN. Thanks to this impressive debut, the company is looking to expand its lineup once again, as evidenced by the recent filing for a Sector Dividend Dogs ETF.
While some key information was not yet available in the SEC filing—such as expense ratio or ticker symbol—we have highlighted below a few of the major details that were released in the document:
The proposed ETF looks to track, before fees and expenses, the performance of the S-Network Sector Dividend Dogs Index. This benchmark looks to take a look at the securities in the S&P 500 index and only focus on the ones with the highest yields for investment (also see Inside The SuperDividend ETF).
This is done by selecting the five stocks in each of the ten GICS sectors which offer the highest yields as of the last trading day in November of a particular year. Once this is determined, the fund looks to equally weight each of these fifty securities, rebalancing once a quarter in order to maintain a basket that is as close to equally-weighted as possible.
Seemingly, the strategy looks to take a page—and name—out of the ‘Dogs of the Dow’ approach that was popularized in the early 90s. This technique looks to take the 10 highest yielding stocks from the DJIA and invest in those in January first of a given year. At the end of the year, investors then cycle into the new 10 stocks which have the highest yields.
The strategy backtested quite well but as more investors flowed into the idea the anomaly disappeared leaving some investors disappointed, especially when compared to prior performance of the scheme (read Three Great ETFs For Your IRA).
Nevertheless, the technique still remains somewhat popular and dividend investing is also an intriguing idea to many investors. In fact, there are currently five ETFs that use a dividend-focused approach to play the U.S. market, including the nine billion dollar SPDR S&P Dividend ETF (NYSEARCA:SDY) and the PowerShares High Yield Equity Dividend Achievers ETF (NYSEARCA:PEY), either of which could pose as huge competition for the proposed ALPS fund.
In SDY’s case the product targets ‘dividend aristocrats’ which looks to exposure investors to companies who have been consistently increasing dividends for at least the past 25 years. With this approach, the fund looks to buy into the 60 highest yielders from among the S&P 1500, paying out to investors a yield of roughly 3.2% at this time.
Beyond this SPDR fund, there could also be a great deal of competition from PEY and its technique. This fund from PowerShares focuses in on the 50 highest yielding companies who have at least a ten year track record of consecutive annual dividend increases (see Top Three High Yield Real Estate ETFs).
With this approach, the fund is heavily concentrated in utilities and financials—these two sectors comprise over 55% of the portfolio—and has an extreme value tilt. Nevertheless, the yield is quite good on this fund, coming in at 3.7% or roughly 180 basis points higher than the S&P 500.
Despite the similarities of SDY and PEY, both have managed to amass a significant amount of assets. This suggests that there is tremendous demand for dividend focused products, especially in today’s low yield environment.
Given this trend, ALPS could definitely have another winner on its hands if it can ever bring its proposed Sector Dividend Dogs ETF to market. The fund could, if ever approved, give investors a new way to play the market with a focus on yield that doesn’t look at constant dividend increases (Looking For Income? Try High Yield Muni ETFs).
This could be an intriguing way to invest in the large cap market, although we will have to wait and see what the yield is on a fund like this. This payout ratio will likely make or break this fund when compared to other high-dividend focused funds that are on the market today, although the well diversified sector exposure could be another huge selling point for ALPS.
This could be especially true for investors who are sick of concentrated dividend ETF investments which generally have high levels of holdings in traditional dividend sectors like utilities or financials, potentially allowing this proposed ETF to obtain a decent following among yield hungry investors (see more on ETFs in the Zacks ETF Center).
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