ETF Duo for Uncertain Times

01/03/2017 9:00 am EST

Focus: ETFs

Carla Pasternak

Editor, The Income Investor

For now, the only certainty is continued uncertainty. Given Trump's unpredictable management style, it seems reasonable to expect increased market volatility ahead, asserts Carla Pasternak, contributing editor to Dow Theory Letters.

In searching for a steady-return ETF to add to our income portfolio ahead of potential volatility, we required four criteria:

1) above-average dividend yield of at least 2.5%;
2) below-average beta of less than 1.0;
3) below-average standard deviation of less than 10.77;
4) a positive year-to-date returns, with attractive technicals

We found about half a dozen that passed muster and selected the two we found most compelling:

SPDR S&P Dividend ETF (SDY)

This $15.5 billion fund tracks the portfolio and performance of the S&P High-Yield Dividend Aristocrats, an index of over 100 companies in the S&P 1500 that have increased dividends every year for at least 20 years.

The fund's portfolio stocks carry an average yield of 2.3%. However, the fund's yield is considerably higher as it typically pays a year-end capital gains payout in addition to regular quarterly dividends.

For the last four quarters, total distributions amounted to $4.63, giving a yield of 5.3%.

The fund has moved sharply higher over the past year as investors have chased after safe yield plays in a low rate environment. Total one-year returns of 25% are nearly twice the S&P 500's 15%. 

Vanguard High Dividend Yield ETF (VYM)

This Vanguard ETF tracks the returns of the FTSE High Dividend Yield Index of mostly U.S. stocks with above-average dividend yields in the FTSE All-World Index.

VYM does not select stocks for sustained dividend increases. But the diversified portfolio — of more than 400 large cap, high-yield stocks — does help offset risk.

The fund carries a 2.8% yield based on the past year's quarterly payouts totaling $2.14. Quarterly payments vary between $0.48-$0.58 per share and consist entirely of dividend income from the underlying portfolio holdings.

VYM has tracked the S&P 500 with total annual average returns of around 7% over the past decade, but in the past year the fund has charged ahead with 21% total returns versus 15% for the benchmark equity index. 

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