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Dogs of the Dow Win in 2018: Will ETFs See Success in 2019?

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The U.S. markets took a massive hit in the fourth quarter of 2018, leading the S&P 500 to lose about 7.0% for the whole year. Factors like the Fed’s policy tightening, renewed global growth worries, an oil price slump, widespread tech selloffs, heightened trade tensions between the United States and China, fears of peaking U.S. economic growth, and finally the partial  government shutdown weighed on the markets (read: 5 ETFs Up At Least 10% in Tumultuous Q4).

However, one investing corner — the ‘Dogs of the Dow’ — beat the market in spooky 2018, having lost only 1.5% despite sturdy yields. It easily beat the parent Dow Jones Industrial Average, which shed about 6% last year.

The Dogs of the Dow represents the 10 highest-yielding blue-chip companies of the Dow Jones Industrial Average, picked after the stock market closes on the last day of the year. As volatility roared in 2018, investors sought safety in these high dividend-yielding stocks. Merck (MRK - Free Report) , Pfizer PFE, Cisco Systems CSCO, Verizon VZ, Coca Cola KO and Procter & Gamble PG drove the index last year.

The stocks that form the Dogs of the Dow are likely to change every year because the relative dividend yields keep changing, thanks to the components’ regular dividend hikes and the changes in stock prices. So, the outperformers often leave the Dogs list, allowing stocks that are in the oversold territory and that have seen their yields rising.

Will Dogs Be Successful in 2019?

After General Electric Co GE was out of the Dow Jones Index last year, JPMorgan JPM replaced it, marking the only change in the Dogs list for 2019. Overall, the new list includes Verizon, International Business Machines IBM, Pfizer, Exxon Mobil XOM, Chevron CVX, Merck, Coca Cola, Cisco Systems, Procter & Gamble and JP Morgan.

The current fundamentals point to outperformance of the Dogs, even in 2019. This is because while a likely oil price recovery should boost two energy stocks, healthcare stocks are expected to maintain their outperformance this year as well.

A steepening of the yield curve, thanks to U.S. economic growth, should support JP Morgan while two tech stocks may rally on cheaper valuation. So, investors having faith in the Dogs of the Dow theory may find these ETFs interesting this year also.

ELEMENTS DJ High Yield Select 10 ETN DOD

This is an ETN option and it seeks to implement the Dogs of the Dow investment strategy by investing in the ten stocks in the Dow Jones with the highest dividend yield. It charges 75 bps in annual fees. DOD is up 1.8% this year versus 0.5% gain of the Dow Jones (as of Jan 4, 2019).

ALPS Sector Dividend Dogs ETF SDOG

The index selects the five highest yielding securities in each of the 10 GICS sectors and equally weighing them. It charges 40 bps in annual fees and has gained 2.2% so far this year.

Invesco Dow Jones Industrial Average Dividend ETF DJD

The underlying index of the fund – the Dow Jones Industrial Average Yield Weighted index –provides exposure to high-yielding equity securities in the Dow Jones Industrial Average by their 12-month dividend yield over the prior 12 months. It charges 7 bps in fees and has added 0.2% so far this year (read: A Dividend ETF Investing Guide).

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