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5 ETFs to Bet on 2018 Dogs of the Dow

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Although the ‘Dogs of the Dow’ strategy has a history of outperforming the Dow Jones Industrial Average over the long term, it lagged in 2017, returning just 19% compared with 25% gains for the blue-chip index. Before 2017, the Dogs had generated outsized returns in six of the seven previous years, missing only in 2012.

The ‘Dogs of the Dow’ represents the 10 highest-yielding blue chip companies of the Dow Jones Industrial Average that are out of favor with the markets and thus have higher dividend yields (due to depressed stock prices). High dividend yields suggest that these stocks are in the oversold territory and will rebound faster than any other stock when the fundamentals changes. As such, the strategy combines both the elements of dividend and value investing.

Given this, honing in on stocks that are cheaper than their peers and unlikely to cut dividends could generate above-market returns and lead to juicy yields. In fact, the new tax legislation will act as the biggest catalyst to these stocks, as it would lead to dividend hikes, thereby resulting in higher shareholder returns (read: 4 Sector ETFs & Stocks Set to Explode Higher on Tax Cuts).

Let’s meet this year’s Dogs of the Dow.

Dogs of the Dow

While eight of the 2017 Dogs of the Dow — Verizon VZ, International Business Machines IBM, Pfizer PFE, Exxon Mobil (XOM - Free Report) , Chevron CVX, Merck MRK, Coca Cola KO and Cisco Systems CSCO — are on the list, the astounding performance of Boeing BA and Caterpillar CAT led to their departure. These two have been replaced by Procter & Gamble PG and General Electric GE. Investors should note that GE is an unusual inclusion in the Dogs given that it cuts its dividend in late 2017 (read: Steer Clear of GE, Bet on These Industrial ETFs Instead).

The Dogs of the Dow could lead this year given that a recovery in oil and natural gas prices could spur outperformance in the two integrated oil giants. Both XOM and CVX are up 3.7% and 2.1%, respectively, to start the year. Additionally, General Electric – the biggest laggard last year – has turned into one of the hottest stock to start the year. The stock logged in the biggest weekly percentage gain since Nov 2016 in the first week of the New Year.

However, the performance of the Dow Dogs differs from bull to bear markets and great caution needs to be exercised while investing in these companies. Still, those looking to invest in these stocks could do so in the basket form via ETFs with lower risk. Below, we have highlighted five ETFs with heavy exposure to the Dogs of the Dow that look exciting for 2018.

ETF Bets

ELEMENTS DJ High Yield Select 10 ETN DOD


This is an ETN option and provides investors pure play to the 10 highest dividend-yielding securities in Dow Jones Industrial Average in equal proportions. It tracks the Dow Jones High Yield Select 10 Total Return Index and charges 75 bps in annual fees. The note has only $38.2 million in AUM while trades in a light volume of around 10,000 shares on an average daily basis. DOD shed 7.2% to start the New Year.

ALPS Sector Dividend Dogs ETF SDOG

This fund applies the ‘Dogs of the Dow Theory’ on a sector-by-sector basis using the S&P 500. This could be easily done by selecting the five highest yielding securities in each of the 10 GICS sectors and equally weighing them. These higher yielding stocks will appreciate in order to bring their yields in line with the market, potentially leading to outsized gains. The approach results in a portfolio of 50 stocks with each security accounting for no more than 2.35% of total assets. The fund has accumulated $2.4 billion in its asset base and trades in a good volume of more than 146,000 shares. It charges 40 bps in annual fees and has gained 2.6% in the first few trading sessions of 2018.

Guggenheim Dow Jones Industrial Average Dividend ETF DJD

The fund offers an alternative, strategic beta approach to the Dow Jones Industrial Average by weighting each security by dividend yield, rather than price. It follows the Dow Jones Industrial Average Yield Weighted index, holding all the 30 Dow stocks in its basket. The 10 Dogs account for 44.2% of the portfolio. The product charges 30 bps in annual fees from investors and has amassed $13.9 million in its asset base. It trades in a paltry volume of 5,000 shares a day on average and has added 2% so far this year (read: DOW ETFs: More Upside Ahead?).   

iShares Core High Dividend ETF HDV

This product provides exposure to 74 dividend stocks by tracking the Morningstar Dividend Yield Focus Index. The nine Dogs of the Dow account for 46.4% of the portfolio, suggesting that the Dogs dominate the returns of the fund. HDV is among the largest and most popular ETFs in the large-cap space with AUM of about $6.8 billion and average trading volume of around 262,000 shares. It charges 8 bps in fees per year and has added 0.6% in the first few trading sessions of 2018.

First Trust Morningstar Dividend Leaders Index Fund FDL

With AUM of $1.7 billion, the fund follows the Morningstar Dividend Leaders Index. In total, it holds 97 stocks that have shown dividend consistency and sustainability with nine Dogs of the Dow collectively accounting for 48.8% of assets. Volume is good as it exchanges nearly 173,000 shares a day on average while the expense ratio comes in at 0.45%. The fund is up 1% so far this year (read: 6 Dividend ETFs of 2017 With At Least 3% Yield & 17% Gains).

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