What’s Inside The Most Popular Smart-Beta Dividend ETFs

At The Juice, we’re building one heck of a personal finance and investing compendium. Earlier this month, we put together an installment with a library of links on diversification, retirement and ETF investing. 

If you check it out and read The Juice regularly, you know we write with a logical flow. Our installments around our major themes build one another. We feel like this is the best way to make sense of money-related concepts and execute sound approaches and strategies with confidence. 

You can’t learn everything in a day. Respect and invest time in the process and whatever you’re doing in life will — pun intended — pay dividends. 

So, today, an example of that process. 

Earlier in the month, we looked at the five most popular dividend ETFs. The ones investors have been searching for most across the platforms of our 100+ financial media partners. You can see them again in today’s Trackstar top five. 

Come to find out they’re all smart beta ETFs. We defined and detailed smart beta ETFs in Tuesday’s Juice.

This process of building a useful arsenal of investing knowledge is a lot like learning a language. 

You keep adding elements — maybe different verb tenses — and, as each element is introduced you might feel a little clueless. However, real quick you get a handle on these new elements and, taken together, each one starts to make sense in association with the others. 

Suddenly, you’re forming sentences and ordering food with complete confidence! 

In the investing context, you learn about passive versus active ETFs. You learn about dividend ETFs. You learn about smart beta ETFs. You add that to discussions about diversification. 

Suddenly, you can intelligently explain why you bought an ETF rather than doing so because some investing guru suggested it. The Juice wants you to have the information and the methods behind the madness so you can make your own choices with a little more research. 

One of the main reasons why you’d go the smart beta route (or going there without even knowing it or why) is to diversify. Sometimes, you’ll see robo advisors tout that they use smart beta ETFs. They do this to set themselves apart. 

While there’s nothing wrong with this, most automated investing gets you in the standard, broad market tracking ETFs. Adding in some passive ETFs that passive track actively-designed indexes (one type of smart beta ETF) helps them — and you — construct more diversified portfolios. 

You can see it with a glance at the holdings of the top three most-searched smart beta dividend ETFs. 

From the above-linked article on dividend ETFs, here’s a summary of what’s inside the Schwab US Dividend Equity ETF (SCHD):

SCHD takes a broad dividend index — the Dow Jones U.S. Dividend 100 Index — and tracks it. The cool thing about SCHD is that, if you’re looking to diversify away from tech dividend payers, such as Apple (AAPL), Microsoft (MSFT) and, now, Meta Platforms (META), you can do so via SCHD. 

Roughly half of SHCD’s portfolio sits in industrials, financials and healthcare. Information technology is the fourth largest sector with a 12.6% concentration. So, Lockheed Martin (LMT) and Chevron (CVX) top the holdings list with the first IT names being Texas Instruments (TXN) and Cisco Systems (CSCO). If you’re heavy tech with SPY and QQQ, SCHD can make an excellent addition on the road to diversification, especially when you consider its ultra-low expense ratio of 0.06%.

Add #2 on the list — the Vanguard High Dividend Yield ETF (VYM) — into the mix and you have diversified your overall portfolio and your dividend stock portfolio even more: 

Also with a 0.6% expense ratio, VYM passively tracks the FTSE High Dividend Yield Index. On the surface, VYM sounds like something distinct to add to, say, SPY, QQQ and SCHD. A look under the hood provides confirmation. 

Like SCHD, VYM isn’t tech heavy. In fact, the ETF provides more exposure to financials, industrials, health care, consumer staples, energy and consumer discretionary stocks than it does tech stocks. Among the names in the top ten holdings, you’ll find JPMorgan Chase (JPM), Broadcom (AVGO), Exxon Mobil (XOM), Home Depot (HD) and AbbVie (ABBV). 

As the name of the fund makes clear, you’re just getting companies with “above-average” dividend yields. However, it’s not potentially dangerous yield chasing. VYM owns solid names with impressive dividend histories.

And this is, at least in part, because of the smart beta approach. As is the case with SCHD, the index VYM tracks uses strict criteria to filter for the cream of the crop in the area where it’s stock picking. So, again, it’s a passive index built via a super active process. 

The third ETF on the list — the Vanguard Dividend Appreciation ETF (VIG) — is just as interesting. 

It’s a bit heavier in tech, but hardly overrepresented. And it gets you into a whole slew of solid dividend-paying and growing financial, healthcare, industrial and consumer staples stocks. 

The index VIG tracks describes itself like this:

The S&P U.S. Dividend Growers Index is designed to measure the performance of U.S. companies that have followed a policy of consistently increasing dividends every year for at least 10 consecutive years. The index excludes the top 25% highest-yielding eligible companies from the index.

You’re catching our drift now, yeah? 

That’s an index that plays by a set rules, passively tracked by some ETFs. The ETFs simply mirror the index’s composition. The index itself creates the rules using an active process that, once complete, it adheres to, rebalancing a few times a year to ensure it’s in line. 

We love this process! 

The Bottom Line: Geeking out over this stuff isn’t just fun, it can help make portfolio construction easier. You have a better idea of exactly what you’re getting into, which, ideally, should help with diversification. 

None of this is to say you shouldn’t just buy SPY and QQQ. That’s almost always step one. But, when it’s time to diversify and add more ETFs, looking at smart beta ETFs, such as the ones we have suggested, can make a lot more sense than giving into the temptation to buy a thematic ETF that makes absolutely zero sense for your investing goals.

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