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IShares Select Dividend: Bigger, But Not Better

Michael Rawson, CFA

Mike Rawson: IShares Select Dividend (DVY) is one of the largest dividend-focused ETFs with nearly $15 billion in assets, but the fund has number of flaws. It is expensive by ETF standards. The fund's 39-basis-point expense ratio is more than twice as high as some of its dividend-focused competitors.

The fund seeks out stocks with the highest dividend yields, yet it does not adequately diversify or screen out companies that are likely to cut their dividends or have subpar earnings growth in the future. Chasing yield can be dangerous. Nearly half of the fund was invested in financial stocks on the eve of the financial crisis.

The fund is too large for its strategy. It holds a number of mid-cap stocks, but due to its large size, the fund owns more than 5% of the outstanding shares of some of these stocks. As a result, the fund has lagged the Russell 1000 Value Index since its inception in 2003. Although it is very popular, we believe investors should use caution when approaching this fund.