Ultimate Guide To TDIV

by on January 28, 2013 | ETFs Mentioned:

One of the common historical criticisms of tech stocks is that they by and large do not pay dividends. That has changed dramatically in recent years, as the blue chip tech stocks of the 1980s and 1990s have matured and accumulated more cash than they can effectively reinvest. With numerous tech stocks now offering dividends, it is a relevant consideration as to how to best build a portfolio of dividend-paying tech stocks. This is where the Nasdaq Technology Dividend Index Fund (TDIV) from First Trust comes into play [see How To Pick The Right ETF Every Time].

In a Nutshell

TDIV seeks to replicate the NASDAQ Technology Dividend Index; this benchmark is a modified dividend value-weighted index that may include up to 100 companies. To be on the list, a stock has to be listed on a major U.S. exchange (the NYSE or Nasdaq), have a minimum daily average volume of $1 million, a minimum market cap of $500 million, a yield of at least 0.5% and cannot have decreased dividends within the past 12 months [see TDIV: Where Technology Meets Dividends].

There are a few other nuts-and-bolts to the index worth mentioning. First, it is rebalanced such that “technology” is 80% of the index weight and “telecommunications” are 20% of the index weight. What’s more, individual stock weightings are capped at 8%, with only five stocks of 8% weighting allowed.

This fund was launched in August of 2012 and as off the beginning of 2013 had net assets under management of around $52 million.

What Makes TDIV Unique

TDIV is the only ETF based upon that NASDAQ Technology Dividend Index. While there are more than 30 tech-focused ETFs available, and many pay dividends, TDIV is the only fund built with dividend payments as an inclusion criterion [see also Monthly Dividend ETFdb Portfolio].

How It Fits in a Portfolio

TDIV has elements that could make it appropriate for a variety of portfolios or investor types. Conservative investors may find that a fund like TDIV adds more capital gains potential to their portfolio, without compromising an income-generating focus and somewhat more conservative outlook. Aggressive investors may find that the fund helps balance some of the risk and volatility of their holdings, as dividend-paying stocks tend to be less volatile.

Last and not least, TDIV should offer investors a mix of capital gains, income and dividend growth potential – while the stocks in this fund are unlikely to grow as quickly as non-dividend paying tech stocks, they will likely offer more growth than more traditional dividend-paying stocks [see 101 High Yielding ETFs For Every Dividend Investor].

What It’ll Cost You

TDIV’s expense ratio is 0.50%, slightly below the Technology Equities ETFdb Category average of 0.53%. Given that dividend payments are basically a given here, investors should also be aware of the tax consequences of those dividends. On a more speculative note, the construction process of the underlying index suggests that this fund might generate distributable gains in the future. This fund is not available for commission-free trading [see TDIV Realtime Rating].

Under the Hood

Although this fund seems modestly diversified, it is perhaps not as well diversified as investors may expect. TDIV holds approximately 75 stocks in total, but more than half of the fund’s total assets are concentrated in its top 10 holdings alone. Perhaps not surprisingly, Intel (INTC), Microsoft (MSFT), Cisco (CSCO), and IBM (IBM) represent almost one-third of the fund’s holdings.

More than half of the fund’s holdings qualify as giant cap, with a further quarter of the fund’s assets in large cap companies. Due to the underlying index requiring members to be listed on U.S. exchanges, the fund is very heavily overweighted toward U.S. tech stocks.

Yield, Volatility, and Performance

This ETF had a recent 30-day SEC yield of 2.41%. Because of the short operating history of the fund, there is no relevant information available yet on its volatility and performance.

Other Options

As mentioned, there are no other ETFs specifically designed to incorporate dividend-paying technology stocks. That said, there are other options for investors to consider. All of the following technology ETFs also pay dividends [Download 101 ETF Lessons Every Financial Advisor Should Learn]:

  • (XLK, A): The Technology Select Sector SPDR holds a similar number of stocks, but it’s somewhat more concentrated in its top ten holdings, with Apple (AAPL) making up about one-sixth of the fund.
  • (IXN, A-): The S&P Global Technology Index Fund is more globally diverse and takes a somewhat more liberal view of “technology.” It holds about 50% more stocks than TDIV, but with a similar top 10 allocation.
  • (IGM, A-): The Goldman Sachs Technology Index Fund holds almost four times as many stocks as TDIV, but with a similar allocation to its top 10 holdings.
  • (MTK, B-): SPDR Morgan Stanley Technology is focused on “electronics-based” technology companies. The fund holds fewer positions than TDIV, but is in some respects MTK is more diversified as the allocations are much more even across its holdings.

[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]

Disclosure: No positions at time of writing.