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ETF Specialist

High Quality, High Fees

This dividend ETF has a compelling strategy, but its expense ratio induces sticker shock.

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Investors have plenty of options when it comes to dividend exchange-traded funds. These funds follow a variety of strategies: Some focus on high income, some on total return, others on quality, and some focus on a combination of all three. One interesting choice is  First Trust Value Line Dividend Index (FVD), a low-volatility dividend strategy ETF that uses proprietary research by Value Line to construct its portfolio. Although "dividend" is in the fund's name, its most attractive qualities are its relative stability, emphasis on quality stocks, and significant value tilt. It was one of the very first dividend ETFs to hit the market, and its strategy has performed very well over the years (its historical performance was good enough to win it a 5-star Morningstar rating)--but its 0.70% expense ratio, a relic of the days before the ETF price wars, is the highest among dividend ETFs today. That fee may have been excusable when FVD launched 10 years ago, but today such a price tag is unjustifiable when investors can buy similar ETFs for just a few basis points a year. FVD's strategy is worth close consideration, but investors must consider whether it's worth the price tag.

Why Dividends
There's a lot to recommend dividend investing. By paying a dividend, companies let investors share in their growth: Dividends are paid from a firm's free cash flow, making a consistent and steadily increasing dividend a good indication of a company's strong financial health. Over the long term, dividend-paying stocks tend to outperform non-dividend-paying stocks, and with less volatility because of the compounding effect of dividends on total return. The effect is particularly strong during bear markets, when dividend income can cushion a decline in price. During the past five years, FVD's index captured only 77% of the S&P 500's downside compared with 87% of its upside. Dividends are also the primary driver of historical stock returns. After adjusting for inflation, dividend income has accounted for nearly 75% of annual U.S. stock market returns over the last century.

Abby Woodham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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