Don’t Count On Dividend ETFs To Play Defense [SPDR S&P Dividend (ETF), Vanguard Dividend Appreciation ETF]

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David Fabian: Many investors consider dividend ETFs to be safer than growth-oriented stocks. The perceived benefit from a consistent income stream is deemed to be more desirable than just riding out a steep drop without getting paid for the adventure.

Dividend paying companies are also considered to be in a more mature phase of their business cycle, which paints them as anchors of stability in a storm of chaos. The fact that they can afford to pay back shareholders from profits must mean that their business models are quite sound.

However, the results of back testing through extreme market conditions seem to uncover a mixed bag in terms of drawdown. In fact, ETFs that track dividend paying stocks can often be just as volatile as a traditional broad market index.

Looking at two different time frames in recent memory, the 2008 financial crisis and 2011 market drop both offered some interesting perspective on risk management. Namely that ETFs dedicated to equity-income are not necessarily a safe harbor when volatility ramps up.

The following chart illustrates the how the three largest dividend paying ETFs performed versus the SPDR S&P 500 ETF (SPY) from January 1, 2008 to March 6, 2009.


As you can see, the Vanguard Dividend Appreciation ETF (VIG) and SPDR S&P Dividend ETF (SDY) had slightly better returns than the market, while the iShares Select Dividend ETF (DVY) actually fell more than its peers. All told, none of these funds outperformed significantly enough to consider them a safer alternative during a period of extreme duress.

The 2011 time frame, while albeit a much shallower and quicker drop, yielded similar results. Each of the dividend ETFs traveled a similar course to the broader market with very little differences among the group.


Ultimately these results reinforce the notion that dividend ETFs are not built for defense. Instead, they are a tool to be used for both income and capital appreciation when bullish phases warrant their application. I am a big fan of all three of the aforementioned funds because they have yielded excellent outcomes under the favorable circumstances we have experienced over the last several years.

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