High-Quality Income Stock ETFs

3/18/2013


You shouldn't have any trouble finding exchange-traded funds (ETFs) with good yields. The challenge is identifying attractive income ETFs likely to outperform.

To find the best income picks among diversified U.S. stock ETFs, we looked beyond yield and used Quadrix to evaluate individual stock holdings.

The table below lists nine ETFs that stand tall among funds paying dividends at least quarterly and yielding at least 1.9%. Quadrix's predictive qualities are driven by ranks for Overall and Value — the two most effective scores in back-tests since the early 1990s. Based on average Quadrix scores for each stock in a portfolio, the nine ETFs earn above-average Value and Overall scores.

NINE TOP INCOME EQUITY ETFs
-- Total Return --
-- Avg. Quadrix Scores For Stocks In Portfolio --
Exchange-Traded Fund (Price; Ticker)
Div.
Yield
(%)
1
Year
(%)
3 Years.
(Annual.)
(%)
Expense
Ratio
(%0
Overall
Value
Div.
Yield
3-Yr.
Div.
Growth
Div. Yield
As % Of
3-Year
Median
Category
iShares Morningstar Large
Core ($91; JKD)
2.0
19.1
13.6
0.20
59
56
73
60
73
Large-cap
blend
iShares Morningstar Small
Value ($102; JKL)
2.4
21.0
14.0
0.30
59
67
64
51
65
Small-cap
value
iShares Russell 1000 ($87; IWB)
1.9
15.9
12.9
0.15
57
53
59
58
62
Large-cap
blend
iShares Russell Midcap Value
($57; IWS)
1.9
21.6
14.8
0.28
56
56
60
53
63
Midcap
value
PowerShares Dividend Achievers
($18; PFM)
2.2
16.0
14.0
0.60
56
51
77
60
72
Large-cap
blend
PowerShares Dynamic Large
Value ($24; PWV)
2.2
21.3
14.5
0.59
68
73
76
63
75
Large-cap
value
SPDR S&P Dividend ($65; SDY)
3.0
18.9
13.8
0.35
56
50
76
59
70
Large-cap
value
WisdomTree MidCap Dividend
($64; DON)
3.8
19.4
15.4
0.38
58
53
72
56
74
Midcap
value
WisdomTree SmallCap Dividend
($56; DES)
4.3
20.8
14.2
0.38
56
56
75
51
72
Small-cap
value

Importantly, all nine ETFs boast above-average scores for the three dividend-based variables in Quadrix that have the best records for uncovering top-performing stocks: dividend yield, three-year dividend growth, and dividend yield versus three-year median yield.

A strictly quantitative screen does not guarantee success, as weak-performing funds can slip through the cracks. To flush out picks with strong track records, we limited our screen to ETFs that outperformed their peer group over the last one and three years. Because of the negative relationship between high expense ratios and future performance, we focused on low-cost funds. Below we profile two standout picks.

Yielding 3%, SPDR S&P Dividend ($65; SDY) is one of the largest and most actively traded income-oriented ETFs. The fund scores well in Quadrix and has been a strong performer in the large-cap value category. A five-year annualized return of 8.5% ranks among the top 8% of its group.


WisdomTree SmallCap Dividend ($56; DES) holds nearly 670 stocks, mostly small and microcap companies. The ETF, yielding about 4.3%, is tilted toward financials (26% of assets) and industrials (19%). At 14.2%, the three-year annualized return outstrips the category average of 12.2%.


OUR RECOMMENDED MUTUAL FUNDS

Through March 12, our Growth Portfolio has gained 7.7% so far this year, versus 7.7% for its benchmark portfolio. The Conservative Portfolio is up 7.1%, versus 5.4% for its benchmark.

-- Year-To-Date --
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
Dreyfus Midcap Index ($32; PESPX)
11.0
C
0
0
83
Dreyfus Small Cap Stock Index
($24; DISSX)
9.9
D
0
0
86
Fidelity High Income ($9; SPHIX)
2.5
B
5
5
74
Homestead Small Company
($30; HSCSX)
10.2
D
7
8
99
Manning & Napier International
($9; EXITX)
4.0
D
7
7
59
T. Rowe Price New Horizons
($37; PRNHX)
12.1
A
10
10
98
Vanguard 500 Index ($144; VFINX)
9.3
C
6
7
83
Vanguard Dividend Growth
($18; VDIGX)
9.4
C
12
12
97
Vanguard Emerg. Mkts. Stock Indx.
($28; VEIEX)
(0.5)
D
0
4
52
Vanguard GNMA ($11; VFIIX)
(0.3)
B
5
4
79
Vanguard Growth Index
($40; VIGRX)
7.9
C
12
12
96
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
0.1
C
0
0
70
Vanguard Selected Value
($23; VASVX)
10.6
D
5
6
81
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
0.3
C
0
0
86
Vanguard Total Bond Mkt. Index
($11; VBMFX)
(0.6)
E
9
0
34
Vanguard Total Int'l Stock Index
($16; VGTSX)
3.6
D
5
4
54
Vanguard Wellesley Income
($25; VWINX)
3.1
B
0
0
100
Vanguard Wellington ($36; VWELX)
6.4
A
6
9
96
Wasatch International Growth
($26; WAIGX)
8.6
A
5
5
100
Wells Fargo Advantage Discovery
($28; STDIX)
11.5
A
6
7
87
* Year-to-date ranks through March 12 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. Fund ratings are percentile ranks based on our fund-rating system.

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