I’m a huge fan of ETF’s, they provide an incredibly easy, cheap and diversified exposure to several asset classes that would be much more difficult to obtain. In fact, I personally think that ETF’s should increasingly be considered an essential part of almost any type of retirement portfolio, especially when it comes to fixed income investments but also many other types. It’s a no-brainer really. That being said, I don’t agree with one type of ETF that is quickly gaining popularity; Dividend ETF’s that buy companies according to a set of filters might be a good solution for some as discussed just a couple of weeks ago but I would argue that most dividend investors should stay away. Why?
#1-Save On Fees: Even though ETF’s are very cheap, especially compared with other types of investments such as mutual funds, they do still have a cost. If I take an ETF such as DVY, the Ishares Dow Jones Select Dividend ETF, that expense is 0.40%. That might not look like that much but over the years it does become significant. Take a look at a sample portfolio worth $50,000 that pays a 3% dividend. Let’s imagine that the standard dividend portfolio increases dividends by 3% per year (very reasonable) while the other increases them by 2.6% (as 0.40% goes to the fees from the fund). Take a look at the difference, it is significant over time in my opinion.:
#2-More Transparency-As nice as it is to have someone else do all of the work, the truth is that in most cases you will not know what the ETF that you own holds. That might not matter much for many of you but when events such as the financial crisis occur, you will regret not knowing what the ETF holds and how exposures you are.
#3-Less Flexibility: While building the Ultimate Sustainable Dividend Portfolio, I’ve been able to adjust it according to what I consider to be good diversification, focus on dividend growth to a certain degree, etc. Sure there are ETF’s that focus on specific dividend sectors such as dividend aristocrats or dividend growth, or high yield dividends, but even those will not provide you with the flexibility that you have when you are managing your own portfolio.
There Are Some Exceptions
Like anything else in life, there are exceptions to this rule as some people might be better off holding dividend ETF’s, especially:
-Those with fewer assets (less than 10K?): It’s difficult to have a diversified dividend portfolio (or any other type for that matter) with so little money. You can always start building and accept the reality of being less diversified in the first few months but if you’d prefer not, holding ETF’s while you grow your assets might make a lot of sense.
-Those with no time: No matter how efficient you become, managing a dividend portfolio does require time. If you hold between 5 and 20 companies, you will need to monitor them, make sure that they are still good holds, reinvest your dividends, etc. Like so many other things in life, it’s important to maintain it as much as possible.
-As Investors Grow Older: At some point, all of us will want to spend less time and energy on the markets. For some, that will happen shortly after retiring while others love it so much that they’ll keep going at it for a couple of decades after retiring. In all cases though, it’s probably a good idea at some point to start scaling back on the required decisions and that might be a good time to move to more passive investing.