WDIV: This Little-Known ETF Is a Must for Your Portfolio
ETFs are extremely useful tools for investors, but often you have to dig deep to find the best ones. Often the more popular and liquid ETFs are suitable more for traders than for investors. Investing, as opposed to trading, requires a strategy that incorporates a fundamental outlook on the underlying assets that it holds. Many of the most popular ETFs just focus on broad indexes, which may perform well, but which are not designed with any fundamental metrics in mind.
Given this, there are several ETFs that are popping up in order to suit the needs of investors rather than traders, but because there are so many investment strategies out there we find that there are nearly as many ETFs catering to investors who wish to employ these strategies. As an investor it can be daunting. However if you search you can find a handful of ETFs that fit your investment philosophy, and they can become a cornerstone of your long term investment portfolio.
One such ETF is the SPDR S&P Global Dividend Portfolio (NYSEARCA:WDIV). This fund holds the world’s global Dividend Aristocrats. Dividend Aristocrats are companies that have not just paid dividends, but which have raised their dividends for twenty-five consecutive years. This consistency speaks to the quality of these companies’ managements, the strength of their businesses, and their devotion to long term shareholders.
What I like about WDIV is not just that it focuses on dividends. After all there are dozens of these sorts of funds. Furthermore there are other Aristocrat ETFs such as the Proshares S&P 500 Dividend Aristocrats ETF (NYSEARCA:NOBL). While this fund should perform well keep in mind that it is limited to the S&P 500. There are small-cap companies and foreign companies that also qualify as Aristocrats, and excluding them limits your portfolio.
WDIV holds just 20 percent of its assets in U.S. companies, which conveniently enough reflects the fact that the U. S. economy accounts for about 20 percent of global GDP. While the fund doesn’t necessarily do a good job of reflecting the global economy (after all China is the second largest global economy but because many of its companies are young only 3.4 percent of the fund is Chinese) it provides the global diversification that Americans’ portfolios are often lacking given their overemphasis on American companies.
Furthermore we find that WDIV, as opposed to NOBL, is more diversified by sector. The nearly 40 percent of American Dividend Aristocrats are in the consumer staples sector, and over half of NOBL’s allocation is in consumer stocks. WDIV is heavily weighted towards utilities and financials, but it is generally more diversified by sector.
If we compare WDIV to NOBL we find that not only is WDIV more diversified in its global scope, but it also offers far better value, as American stocks have been outperforming over the past few years. Over the long term owning the undervalued stocks in the WDIV can make a huge difference in performance. For instance if we compare the two funds’ P/E ratios we find that WDIV trades at 14.8 times earnings, whereas NOBL trades at 19 times earnings. WDIV trades at just 1.7 times book value, whereas NOBL trades at 3.25 times book value. Finally, if we look at dividend yields WDIV has a 2.45 percent yield, whereas NOBL has a 1.4 percent yields.
From this data it seems that while American Dividend Aristocrats are fully appreciated foreign Dividend Aristocrats are not, and there is an opportunity in this disparity.
Ultimately WDIV is an inexpensive fund that is going to generate steady returns over the long run. It holds shares in some of the world’s best managed and most stable companies that can provide returns to shareholders even through recessions. With this in mind, I think investors can overlook the fund’s minimal liquidity and make it a key portfolio holding. Note that given the fund’s lack of liquidity investors should use limit orders when purchasing shares so that they aren’t hurt by the aberrant market activity that we frequently see in illiquid assets.
Interested in ETFs? ETFs have altered the investment landscape for retail investors, but how do you choose which one to buy? From an earlier article we wrote, here’s a recap of the best tips to follow in order to pick the best ETFs:
1. Look at expense ratios
ETFs are funds. You are paying a company to compile several assets for you, and this costs money. Depending on the kind of fund, the cost can vary. For instance, if you are buying a managed ETF such as those offered by AdvisorShares, you aren’t just paying for transaction fees but for research as well — and this increases costs. On the other hand, if you just want a simple index fund you should expect costs to be very low.
For many asset classes you have several ETF options. If you come across two funds that offer essentially the same kind of exposure, one way to choose the best fund for you is to pick the one with the lowest expense ratio. The expense ratio is the fee that you pay the fund manager every year to maintain the portfolio. Every ETF’s website should list the expense ratio.
The only time that you should be willing to buy a fund with a higher expense ratio is if there are mitigating circumstances, which I discuss in the next two tips.
2. Volume and assets under management matter
You typically want to own ETFs with larger amounts of trading volume, and with larger amounts of assets under management. In the latter case, larger funds are typically less expensive to manage on a dollar by dollar basis. Regarding the former point, you want to make sure you own ETFs that have a lot of trading volume because you want to be able to sell out of your ETF if you need to for whatever reason. For instance, if you are looking to buy gold through an ETF, I would stay away from the ETFs Gold Trust (SGOL), which trades just a few thousand shares every day. I would rather own the SPDR Gold Trust (GLD), which trades a few million shares every day. If you need to sell the latter fund, you should have no trouble doing so in a timely fashion, and you will be able to do so at a price that is very close to the funds’ net asset value.
3. Maximize your diversification
One of the great things about ETFs is your ability to diversify your holdings through the purchase of a single trading vehicle. But you need to make sure that you are actually diversifying. For instance, consider the Powershares DB Agriculture Fund (DBA) versus the Rogers Agricultural Commodity ETF (RJA). Both funds are designed to give investors exposure to a variety of agricultural commodities. However, the former fund holds just a few commodities while the latter holds more than a dozen. It holds commodities such as oats and greasy wool that DBA doesn’t. If your goal is to get broad exposure to agricultural commodities, RJA is probably a better option.
Conclusion: Making sacrifices
Ultimately, you are going to be in a situation where you need to decide: Do I want more diversification or more liquidity? Or, do I want a lower expense ratio or more diversification?
Ultimately, there is no right or wrong answer to these questions. You need to decide what is important to you as an investor. Maybe it is worthwhile to pay an extra 0.2 percent per year in order to get exposure to 500 stocks instead of 50 stocks. Maybe it isn’t worthwhile. There isn’t an “apples to apples” comparison for every set of ETFs. However, a good rule of thumb is as follows: use the above three rules to eliminate extreme cases, and otherwise go with your personal preference. So for instance, don’t buy a fund with a 3 percent expense ratio even if it is liquid and highly diversified. But if you are choosing between paying 0.5 percent and 0.3 percent, but the 0.5 percent fund is much more diversified and liquid, it may be the better option. As another example, don’t buy an ETF with just $10 million under management and with just 5,000 shares traded in an average day, even if it is highly diversified and even if it has a low expense ratio. It may end up being too difficult to sell.
If you eliminate extreme cases, you will end up with a list of candidates for which making the “wrong” choice will have a negligible impact on your performance. Under these circumstances, you will be prepared to take advantage of the many benefits of ETFs.
Disclosure: Ben Kramer-Miller has no position in the ETFs mentioned in this article.