Weighing Risk vs. Reward for Dividend ETFs

With 149 products currently available to U.S. investors, dividend ETFs have $323 billion in combined assets under management as of February 4, according to FactSet data.

Historically, dividend ETFs have resonated most with long-term, conservative investors who are looking for low-risk investments that generate income as well as the possibility of capital appreciation over time.

Many investors also turn to dividend ETFs because they believe companies that return profits to shareholders through dividends are typically more stable blue-chip companies.

This is why it is important to address the risk along with the reward when choosing to which funds to allocate capital. 

Looking at the Sharpe ratio can help determine the funds that will deliver the highest returns while factoring in risk and volatility. The ratio describes how much excess return you receive for the extra volatility caused by holding a riskier asset. 

Looking at the nine-year record for all global equity income and global large-cap core ETFs, sorted by nine-year Sharpe ratio, the Guinness Atkinson SmartETFs Dividend Builder ETF (DIVS A-) sits at the top of the pack, as of January. DIVS’ volatility-adjusted returns, as measured by Sharpe ratio, are better than those of its category peers. 

A nine-year period was selected for review because dividend ETFs are typically favored by long-term investors, and DIVS was incepted just shy of the 10-year period.

The only fund with a higher Sharpe ratio during the nine-year period is the Morgan Stanley Global Franchise Portfolio, an open-end fund; however, where DIVS beats MSFAX is in consistent return over a five-year period.

When considering ETFs exclusively, organized by nine-year Sharpe ratio, DIVS is trailed by the BlackRock iShares Global 100 ETF (IOO A-), the BlackRock iShares MSCI Kokusai ETF (TOK B+), and the BlackRock iShares MSCI World ETF (URTH A-).

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