Going Beyond Costs With Dividend ETFs

One of the primary reasons advisers and individual investors remain enthusiastic about exchange traded funds is low fees. Add to that, ETF fees are consistently declining, making it harder for higher-priced actively managed mutual funds to retain market share.

Plain vanilla broad market ETFs usually have the lowest fees, but investors can find low expense ratios on dividend funds, too. Nearly 10 U.S.-listed dividend ETFs have annual expense ratio of 0.10 percent or less.

What Happened

With an annual fee of just 0.07 percent, or $7 on a $10,000 investment, the Schwab U.S. Dividend Equity ETF SCHD is one of the least expensive dividend funds. A recent survey by Schwab indicates ETF investors continue prioritizing fees.

“The two highest priority evaluation selections made by those ETF investors surveyed were low expense ratio and total cost (defined in the survey as commissions, expense ratio and bid/ask spread),” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Monday. “Both of these were either extremely important or somewhat important to 95% of the respondents, followed by 94 percent for how well the ETF tracks its index.”

SCHD tracks the Dow Jones U.S. Dividend 100-Index, which requires member firms to have raised payouts for a minimum of 10 consecutive years. Eight of the ETF's top 10 holdings are Dow components, including Home Depot, Inc. HD and Exxon Mobil Corp. XOM. Schwab clients can realize additional savings with SCHD because the ETF is available commission-free on the Schwab ETF OneSource platform.

Why It's Important

Investors should remember that “cheap” doesn't always mean “good,” nor higher fees always lead to “bad” funds. The WisdomTree U.S. Quality Dividend Growth Fund DGRW charges 0.28 percent, a very reasonable fee when considering this ETF's penchant for topping lower-cost rivals.

“While both SCHD and DGRW earn a top rating from CFRA for their holdings, costs and more, we think investors need to go beyond finding a cheap ETF available commission free on their preferred brokerage platform,” said Rosenbluth.

Over the past three years, DGRW has outperformed SCHD as well as several of the other lowest cost dividend ETFs.

What's Next

Investors are likely to continue prioritizing fees when it comes to ETFs, but they should do their due diligence to avoid leaving returns on the table in the name of cost savings.

CFRA has Overweight ratings on DGRW and SCHD.

Disclosure: The author owns shares of DGRW.

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