I read an article on Kiplinger.com titled A Dividend ETF Goes Astray that I thought was interesting. The iShares Dow Jones Select Dividend Index (symbol DVY) which is an exchange-traded fund, tracks an index that invests in the stocks of the 100 highest-yielding U.S. companies that have maintained or boosted their dividend over the past five years. Sounds good right? In fact the ETF was labeled the best ETF in the November 2006 issue of Kiplinger.
The problem is that when the ETF came into existence in 2003, 43% of its holdings were in the financial sector with Bank of America weighing in at a hefty 5%. Fast forward to 2008 and the ETF had 49% of its holdings in financial stocks. Uh oh. During the subsequent bear market, the DVY lost an astounding 44%, 5 points worse than the S&P 500.
Dow Jones, which determines the Select Dividend index's components, is changing its methodology for over hauling stocks from yearly to quarterly to help guard against this in the future. This article makes a good case for having a diversified and balanced ETF portfolio.
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