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5 Dividend ETFs to Ride Out Market Volatility

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Amid low interest rates and increased market volatility, the appeal for dividend investing is on the rise. Though the strategy doesn’t offer dramatic price appreciation, it is a major source of consistent income for investors in any type of market.

The dividend-focused products offer safety through payouts, and stability in the form of mature companies that are less volatile to large swings in stock prices. This is because the companies that pay out dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

Current Market Trends

The stock market has been witnessing wild swings in recent months. After the best August in decades, Wall Street logged its worst month since March in September. Though massive fiscal and monetary stimulus, and hopes of a potential vaccine have been supporting the stocks, resurgent COVID-19 infections, uncertainty in additional stimulus and the upcoming election have made investors jittery (read: Pandemic Surges, Stimulus Fades: ETF Strategies to Follow).

Additionally, bouts of economic data underscore a mixed picture for the economy. Per the latest jobs data, the U.S. economy added 661,000 jobs in September, which is fewer than expected and the slowest increase since the recovery began in May. Unemployment dropped to 7.9%, down from a historic record of 14.7% in April but higher than 4.8% when Trump took office in January 2017, indicating that the recent pace of recovery is slowing. The current level marks the worst job loss that any president has faced going into an election based on records going back to the Second World War. The slowdown reflects that government money to help businesses and millions of unemployed has run out.

Although U.S. manufacturing activity growth cooled slightly in September with the Institute for Supply Management (ISM) index dropping to 55.4 last month from 56 in August, it expanded for four consecutive months. Additionally, retail sales climbed 1.9% in September, marking the fastest pace of growth in three months, buoyed by higher demand for goods that complement life at home, including furniture and electronics. Meanwhile, consumer sentiment hit the pandemic high in early October with the University of Michigan consumer sentiment index rising to 81.2 from 80.4 in September (read: Will Slowdown in US Manufacturing Hurt Industrial ETFs?).

Further, housing remains one of the bright spots of the economy with homebuilder confidence hitting an all-time high in September. Record-low mortgage rates are encouraging people to buy more homes and have made refinance cheaper. This trend is likely to continue at least this year on the Fed’s easy money policy and provide a boost to the homebuilder stocks.

After plunging the most in the second quarter since the Great Recession, the U.S. auto industry also gathered momentum in the third quarter with new vehicle sales dropping 9.7%. This is a small dip compared to the 31% decline in the second quarter (read: Ride on a Recovering Auto Industry With These ETF & Stocks).

Amid volatility, we have highlighted the five most-popular dividend ETFs that could be compelling choices going ahead into the election. All these have a favorable Zacks ETF Rank #2 (Buy) or 3 (Hold).

Vanguard Dividend Appreciation ETF (VIG - Free Report)

This is the largest and most-popular ETF in the dividend space with AUM of $47.3 billion and average daily volume of about 1.1 million shares. The fund follows the NASDAQ US Dividend Achievers Select Index, which is composed of high-quality stocks that have a record of raising dividend every year. It holds 212 securities in the basket with none accounting for more than 4.5% share. The fund charges 6 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.

Vanguard High Dividend Yield ETF (VYM - Free Report)

This fund provides exposure to the high-yielding dividend stocks by tracking the FTSE High Dividend Yield Index. Holding 413 securities, the product is pretty well spread out across components as each holds no more than 4% of the assets. It has amassed $26.2 billion in its asset base while trading in volume of 1.6 million shares a day on average. Expense ratio is 0.06%. VYM has a Zacks ETF Rank #2 with a Medium risk outlook.

SPDR S&P Dividend ETF (SDY - Free Report)

With AUM of $14.8 billion and average daily volume of 567,000 shares, this fund provides a well-diversified exposure to 117 U.S. stocks that have been consistently increasing dividends every year for at least 20 years. This can be done by tracking the S&P High Yield Dividend Aristocrats Index. Each firm accounts for no more than 2% of the assets. The fund charges 35 bps in fees and has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares Select Dividend ETF (DVY - Free Report)

This fund provides exposure to the high dividend-paying U.S. equities with a five-year history of dividend growth. It follows the Dow Jones U.S. Select Dividend Index and holds 100 securities in its basket with each accounting for less than 2.4% of assets. The ETF has AUM of $12.2 billion and an average daily volume of around 705,000 shares. It charges 39 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares Core Dividend Growth ETF (DGRO - Free Report)

This fund provides exposure to companies having a history of sustained dividend growth by tracking the Morningstar US Dividend Growth Index. It holds 418 stocks in its basket with each accounting for no more than 3% share. The fund has accumulated $11.6 billion in its asset base and trades in solid volumes of about 1.6 million shares. It charges 8 bps in fess per year and has a Zacks ETF Rank #2 with a Medium risk outlook (read: Dividend Growth ETFs to the Rescue for Tougher Times Ahead).

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