In an effort to find safety from last year’s turbulent market, investors poured over $60 billion into dividend-focused ETFs, but less than a year later, the trade is failing, reports an article in Bloomberg. Those ETFs have been left in the dust by this year’s tech rally, especially the $18 billion iShares Select Dividend ETF which has fallen 5.4%, proving the risks that come with trying to time the market.
Among the other big losers are the SPDR S&P Dividend ETF and the Schwab US Dividend ETF, down 3% and 2.4%, respectively. But there have been a handful that have managed small gains, such as the Invesco Dividend Achievers ETF and Vanguard’s Dividend Appreciation ETF, up 6.6% and 9.6%, respectively. Because dividend ETFs are light on the “Magnificent Seven” that dominated the market this year, they lost out on that rally; Matt Bartolini of State Street told Bloomberg that there’s a “value bias” to dividend strategies and this year was a “growth market.” Indeed, half of the SPDR S&P Dividend fund is tied up in consumer staples, healthcare, and utilities—three of the sectors that declined this year. That’s the story for most of these ETFs, that are heavily focused on value stocks and not the Big Tech mega-caps that did so well this year.
Many also disagree whether or not dividends benefit stock returns, and stocks that are valuable because of their cash flows did particularly bad this year because of the rise in bond yields, which many investors turned to instead. After the huge inflows from last year, only $786 million was invested into dividend ETFs in 2023, the least amount since 2006, according to Bloomberg Intelligence data that is cited in the article.
However, paying out a dividend over many years is considered a telling attribute of a stable company. “Raising your dividend for 25 plus years is no easy feat,” says Rupert Watts of Dow Jones Indices, adding “These are high quality companies.” In fact, the S&P 500 Dividend Aristocrats Index, made up of S&P 500 companies that have done just that, have beaten almost every active manager in the U.S. for the last 10 years. But compared to the total return for the S&P 500, the index has fallen short. And some managers try to steer their clients away from being wholly focused on earning dividends. “[T]hat’s too short-sighted of a perspective,” Sam Huszczo of RIA SGH Wealth Management told Bloomberg, “because if the price appreciation is worse because you’re getting something that has no ability to grow, you’re not getting the full value of those stocks compared to other places in the market.” One of those other places in the market are bonds; because of their high interest rates, they’re offering investors a steadier income stream than dividend funds, the article notes.