Russell Debuts Large Cap, Small Cap Dividend ETFs

by on March 16, 2012 | ETFs Mentioned:

Russell rolled out two more products to add to its rapidly expanding suite of ETFs this week, launching two funds that specifically target stocks with high dividend yields. The Russell High Dividend Yield ETF (HDIV) will target components of the Russell 1000 that exhibit the highest dividend yields, while the Russell Small Cap High Dividend Yield ETF (DIVS) will focus on high yielding stocks that make up the Russell 2000. HDIV and DIVS join a crowded field of ETFs that target dividend-paying stocks; there are now more than 40 ETFs that focus on dividend-paying stocks [see also High Yield ETFdb Portfolio].

The new Russell ETFs are linked to indexes that also include quality screens to avoid companies exhibiting temporarily high dividend yields that are the result of a severely depressed stock price. “These measures of financial strength were created to help investors avoid chasing dividend yield, where quality is often sacrificed in search of higher yield,” said Greg Friedman, managing director of Russell’s global ETF product group. “By using quality screens embedded in the underlying transparent, rules-based indexes, we believe Russell has improved upon structural weaknesses common in traditional dividend products and brought an improved total return approach to the ETF marketplace” [see Dividend ETF Investing: Four Critical Factors To Consider]. 

Under The Hood: HDIV

HDIV will be linked to the Russell U.S. Large Cap High Dividend Yield Index, a benchmark that includes members of the Russell 1000 that have the highest dividend yield (subject to certain quality screens). The index consists of only about 75 companies, meaning that a very small portion of the Russell 1000 universe is represented in HDIV. The largest weights in the underlying index are afforded to Kraft Foods (5.1%), Merck (5.1%), Procter & Gamble (5.1%), and AT&T (5.1%). HDIV maintains a relatively concentrated portfolio; the top ten components make up about 50% of total assets [see HDIV Holdings]. 

At the end of February the index to which HDIV is linked had a dividend yield of about 4.4%. ETFs linked to the Russell 1000 Index, such as IWB, generally have a dividend yield closer to 2%. HDIV will charge an expense ratio of 0.33%, slightly below the average for the Large Cap Value Equities ETFdb Category. Access to the Russell 1000 is available for as little as 12 basis points through VONE.

Under The Hood: DIVS

DIVS features a very similar methodology to HDVI, except this ETF draws from the Russell 2000 Index. DIVS holds 150 of the highest yielding stocks from that small cap universe, with the underlying index maintaining the biggest allocations to Biomed Realty Trust (2.1%), National Retail Properties (2.1%), and Hancock Holding (2.0%). The related index has an aggregate dividend yield of about 3.8%, which is considerably higher than “plain vanilla” products linked to the Russell 2000 [see also Tax Reform And Dividend ETFs: Cause For Concern?]. 

DIVS charges an expense ratio of 0.38%. ETFs linked to the Russell 2000 charge as little as 0.15%.

Disclosure: No positions at time of writing.