Subscribe
Exchange-Traded Funds (ETF) have become the rage over the last year or so. They have challenged mutual funds for investment dollars. ETFs provide investors with diversification like a mutual fund but also enable an investor to sell his position during the trading hours of the stock market. Mutual funds tabulate their positions at the end of the trading day and give investors the opportunity to buy and sell at that time, but only at the close of trading.
As with mutual funds, you can invest in an ETF for a myriad of objectives. Certain Exchange-traded funds will be conservative and buy only US government bonds while other of these funds find aggressive investments in emerging markets that gyrate wildly. Investors need to know what types of investments are in ETFs before blindly putting money into them. One ETF that seems to make sense to us right now is the iShares Dow Jones Select Dividend Index (DVY). This ETF is comprised of 100 of the highest yielding stocks in the Dow Jones Total Market Index ?” excluding real estate investment trusts. Dividends can be a cushioning factor in a difficult market environment. Through January 16th, the S&P 500 was lower by 6.31% and the NASDAQ Composite was down over 10% while the DVY was off only 3.81%.
This ETF has a dividend yield of 3.66% and a low expense ratio of 0.40%. This makes it attractive for investors who want some income, a chance for growth and low expenses. The low turnover ratio of six percent also gives investors comfort in that “what you invest in is what you get.” The ETF trades nearly twenty percent off its 52-week high of $75.82 at approximately $61.00 per share.
Some of the top 10 holdings (as of December 31, 2007) were Merck, AT&T, Altria Group and PNC Financial. There is a solid mix of dividend paying stocks ?” some having strong performance while others have suffered with the sub-prime crisis. This investment is appropriate for investors seeking current income, desiring diversification and willing to accept the risk of a stock investment.
Given the current stock market environment, one in which we would expect to continue well into 2008, the iShares Dow Jones Select Dividend Index is a good place to gain market exposure yet have the comfort of dividend income.
One word of caution when considering purchasing an Exchange-Traded Fund is that many of these funds are not broad stock market index funds as they were once intended to be. The majority of ETF’s are either sector, industry, region or country specific and therefore carry additional risk other than stock-market risk.
One word regarding the current state of the stock market, please exercise caution. We do expect extreme volatility to continue as the positive catalyst that should come from the recent reduction in interest rates by the Federal Reserve has yet to impact the economy. Furthermore, any fiscal stimulus that the congress chooses to enact is also a month or two away. We therefore strongly recommend that investors keep a good chunk of “dry powder” on the sidelines in the form of cash.