Cheap ETFs should now be in focus as the Labor Department’s new fiduciary rule requires financial advisors to keep the “best interest” of their clients ahead of their own at the time of selling retirement products.
Though these rules are yet to be implemented, the price war is on among ETF issuers. BlackRock already announced a fee cut on 15 iShares core ETFs across US equity, fixed income and international equity asset classes (read: How Retirement Saving Rules are Making ETFs More Attractive).
No wonder, many other issuers will now slash expense ratios of their products to stay competitive. After all, cheaper funds have the potential to outperform the pricey choices, given other important factors like trading commissions and bid/ask spreads constant. Considering an expense ratio of 1%, a fund of $10,000 invested at 8% annual return will grow to $19,672 in 10 years, while the same fund invested at an expense ratio of 0.1% will grow to a higher amount of $21,390.
Moreover, the difference in total return becomes quite significant as we increase the holding period. Considering the same parameters, with an expense ratio of 0.1% the fund of $10,000 will grow to $97,869 in 30 years (at the same 8% rate of return). The same fund will however grow to a much lesser value of $76,123 with an expense ratio of 1%.
And what could be better than picking cheap dividend ETFs to maximize returns?
Investors are presently downplaying the weaker-the-expected September job data and wagering more on otherwise steady U.S. growth momentum and a December rate hike. Thanks to this sentiment, yield on the 10-year U.S. Treasury note spiked to 1.77% on October 11, 2016 from 1.63% noticed at the start of the month (read: ETF Strategies for a Rising Rate Environment).
Though the rising rate environment is not good for dividend investing, there are investors who want to beat the yields provided by the benchmark U.S. treasury bonds and flock to the high dividend paying segment (read: High Quality Dividend Stocks & ETFs for Uncertain Markets).
There are more than 1,900 ETFs from various issuers at present in the 2.41 trillion-ETF industry. Of these, we have highlighted three high dividend ETFs with ultra-low expense ratios that could prove to be profitable (read: 5 Preferred Stock ETFs Yielding 4% or More).
Vanguard High Dividend Yield ETF (VYM - ETF report)
This large cap centric fund provides exposure to the high yielding U.S. dividend by tracking the FTSE High Dividend Yield Index. Its expense ratio comes in at 9 bps (read: 3 Excellent Dividend ETFs for Growth and Income).
Holding 421 securities, the product does not put more than 4.9% share in each. In terms of sectors, the fund is widely spread out with consumer goods, technology, financials, industrials, health care and oil & gas taking double-digit exposure in the basket. The ETF’s yield is 2.98% (as of October 11, 2016).
SPDR S&P 500 High Dividend ETF (SPYD - ETF report)
This fund charges 12 bps in fees. It looks to track the S&P 500 High Dividend Index designed to measure the performance of the top 80 dividend-paying securities listed on the S&P 500 Index based on dividend yield. The fund yields about 3.72% annually.
The fund does not put more than 1.67% in any stock. High dividends are derived from utilities and the REIT sector.
iShares High Dividend ETF (HDV - ETF report)
This product provides exposure to dividend paying stocks by tracking the Morningstar Dividend Yield Focus Index. From a sector look, the fund is well spread out with double-digit exposure to Energy, Consumer Staples, Health Care, IT and Telecom. It charges 8 bps in fee per year and yields 3.44% annually.
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