Detailed Question

A reader left a great question that you can read here, which I will try to answer with this post. The comment was partly in response to a comment I made about not getting too carried away with success of the dividend ETFs of late. They have done well because large cap value has done well.

To be clear I am generally a fan of dividend ETFs but I do not think they will be up if large cap value goes down. The comment from the reader says that SDY is superior and while that may be, if IWD, the reader's proxy for large cap value, goes down by 10% SDY will not be up 5%. According to Portfolioscience.com SDY and IWD have a .897 correlation.


If I understood correctly the reader looked at a similar chart as I have placed here. He looked at SDY's ratio to IWD. Since DVY has been around longer I used that one instead. I think this is valid because SDY and DVY have 0.92 correlation and the returns of each have been very similar since SDY's inception last November.

The chart covers two years and it shows DVY lagging IWD. Since May, the nod goes to DVY.

The second chart is the more typical comparison. It covers two years and shows IWD pulling away by a mile.

For the trailing twelve months IWD is up 13% and DVY is up 6%. The dividend advantage for DVY is only about 150 basis points.

For the last three months the two are dead even and SDY also had the same return for the last three months.

The reader then goes on to ask how I would allocate the large cap portion of the portfolio for what he calls moderate growth using ETFs.

I think the reader is looking for a simple two or three ETF suggestion. This is not easy for me to answer as I don't really use cap size ETFs in portfolio construction.

Where the portfolio is large enough to diversify fully I think I would rather add yield from other places, like maybe from foreign exposure. I will say that the WisdomTree domestic ETFs, in the context of this conversation, look very interesting. The domestic high yielding fund (DHS) yields 3.96% and it is heavily weighted in large cap stocks. There is no real track record yet to speak of for the fund. I have no doubt the back testing of the index looks great but going on back testing alone is a tough one for me for something that I view as being very broad based.

Another point, relative to the original comment is there seems to be no mention of large cap growth. Ignoring growth is a bad idea. I think ignoring anything is a bad idea. I am not saying the reader is ignoring growth but there is no mention of it in the question.

I do own DVY in some accounts where full diverisification, the way I think of it, is not an option.