A Tale Of Two Dividend ETFs: SDIV vs. VIG

by on October 18, 2011 | Updated November 20, 2012 | ETFs Mentioned:

In the current environment, it seems as if most investment strategies have fallen out of favor with the vast majority of financial advisors and investors. Emerging markets, recently the source of turbo-charged growth, have been hammered by concerns about inflationary pressures and slowdowns in growth. Agricultural and energy commodities, which seemed to be on an unstoppable run higher, have encountered major weakness. Even gold, the shining star of the last several years, has lost a bit of its luster.

But not all strategies are down-and-out; investors have been flocking to dividend-focused methodologies in droves, and in many cases embracing exchange-traded products as the most efficient way of tapping into this strategy. With fixed income yields at record lows and showing no signs of recovering any time soon, many are turning towards high yielding stocks as a way to boost current returns and scale back overall risk exposure [For more actionable ETF investment ideas, sign up for the free ETFdb newsletter].

There are more than a dozen ETFs that offer low cost, low maintenance access to techniques that focus on dividend-paying companies. From ETFs linked to dividend-weighted indexes to those that screen components by consistency of distributions, the choices are numerous–and increasingly popular [see 25 Dividend ETFs For Yield Hungry Investors]. This universe expands well beyond the U.S. equity market; there are ETFs designed for delivering dividend-focused access to just about every major market around the globe.

Looking Under The Hood

For advisors looking to achieve access to a basket of dividend-paying stocks, ETFs can represent a tremendously powerful tool that offers up diversified, hands-off exposure at a bargain basement price [see The Appeal Of Dividend ETFs]. But it’s important to understand that not all dividend ETFs are created equal; the discrepancies in expected yield and risk can vary wildly from product to product.

That kind of generic advice doesn’t always communicate the point clearly, so perhaps it is more helpful to take a detailed look at a real life example. Consider two popular ETFs that offer access to dividend-related strategies: Vanguard’s Dividend Appreciation ETF (VIG) and the Global X SuperDividend ETF (SDIV). Those judging a book by the cover might assume that these two funds are generally similar in terms of the risk / return profile offered up. But looking at the methodologies behind these products reveals some significant differences [see Dividend ETF Investing: Four Critical Factors To Consider].

VIG Values Consistency

Let’s start with VIG, which has been around since 2006 and has more than $7 billion in assets. This fund is linked to the Dividend Achievers Select Index, a benchmark that includes U.S. stocks that have a history of increasing dividends for at least ten consecutive years. Coming off a tumultuous stretch that saw many corporations cut distributions in order to hoard cash, that criteria ensures that only the most consistent dividend payers make the cut [see How To Find The Right Dividend ETF].

VIG’s components are generally well-known, blue chip firms; of the top ten holdings listed on Vanguard’s web site, five are also in the top ten for the S&P 500 ETF (VOO). Because VIG’s methodology values consistency of dividend, the underlying portfolio generally consists of blue chip, mega cap stocks that have been steadily increasing distributions. And in terms of yield, the enhancement relative to “plain vanilla” products such as VOO is considerable. As of October 11, VIG’s 30-day SEC yield, a standardized measure of current returns, was 2.57%–or 22 basis points higher than VOO [see VOO Realtime Rating]. 

The most consistent dividend payers are not necessarily the companies that will offer up the most attractive yields. In fact, in most cases those firms with a steady track record of distributions offer yields that differ only slightly from the broader market, tending to be large cap stocks that are found in the most widely-followed equity indexes [see Analyst Report: VIG]

SDIV Values Yield

SDIV, the “super dividend” ETF from Global X, is much younger than VIG; this product debuted in June 2011 and has gathered about $30 million in assets since inception. The differences don’t stop there; although SDIV also offers targeted exposure to dividend-paying companies, the methodologies employed by this fund give it little in common with VIG.

SDIV is linked to the Solactive Global SuperDividend Index , a benchmark comprised of equal positions in 100 global stocks that rank among the highest dividend yielding securities in the world. While the index applies certain dividend stability screens, magnitude of yield–not consistency–is clearly the focus of this fund.

The result is a portfolio that includes a number of smaller companies with hefty dividend yields–but not necessarily a track record of steadily increasing their payouts [see Examining International Dividend ETFs]. Whereas VIG is dominated by blue chip stocks, SDIV’s portfolio contains a number of smaller companies–including some that can potentially exhibit significant volatility:

The market cap breakdown isn’t the only place where this product differs from the Dividend Appreciation ETF; SDIV dwarfs VIG in terms of current yield, offering a much higher payout. According to the Global X web site, SDIV’s 30-day SEC yield was recently in the ballpark of 8.7%–or more than three times the yield on VIG.

Using the September 30 stock price for VIG and annualizing the Q3 distribution gives VIG a yield of about 2.3%. Doing the same for SDIV gets a yield of more than 9%–a current return that is tough to find in this environment [see The Best Dividend ETFs Aren't Dividend ETFs At All].

SDIV vs. VIG
  SDIV VIG
30-Day SEC Yield* 8.74% 2.57%
% Large / Mega Caps** 15.6% 85.5%
% U.S.** 36% 100%
50 Day Volatility*** 41.6% 34.6%
September 2011 Performance -12.2% -6.2%

*Source: Issuer web sites

**Source: Morningstar

***Source: ETFdb.com

Of course, in exchange for that juicy yield, investors in SDIV are taking on some additional risk relative to VIG; the SDIV portfolio generally consists of smaller, less stable companies (some of which are from emerging markets) whose attractive yields may be attributable in part to depressed stock prices [see Analyst Report: SDIV]

Verdict: VIG vs. SDIV

SDIV and VIG may appear to be similar on the surface; both offer exposure to a diversified basket of dividend-paying stocks. But a look under the hood reveals that in fact these two products have very little in common. Rather, these two products are designed for very different purposes; SDIV maintains appeal as a tool for risk-tolerant investors looking to maximize current returns from the equity portion of their portfolios, while VIG can perhaps be used most efficiently as a way to scale back risk by concentrating exposure in stable firms with long track records of cash distributions [try our Free Head-To-Head ETF Comparison Tool].

Neither, of course, is universally superior to the other; the suitability of these funds depends on client return objectives and risk restraints. If used properly, both SDIV and VIG can be very powerful tools. But if used incorrectly–perhaps as a result of limited research–these products have the potential to deliver too little yield or too much risk.

The lesson, as always, is to do your homework when considering a potential ETF investment. The name only tells part of the story; the devil is really in the details.

Disclosure: No positions at time of writing.