ETFs With High Yields, Low Costs

10/18/2010


Fund investors want it all: rock-bottom expenses, attractive yields, and solid relative performance. We found nine exchange-traded funds (ETFs) that satisfy all three requirements. 

The Sept. 20 issue of the Forecasts stressed the importance of low expenses and their positive effect on future fund returns. Low expenses have contributed to explosive asset growth in ETFs, most of which are low-cost index funds. Also, ETFs are not weighed down by the distribution costs incurred by traditional mutual funds.

For instance, among large-cap value funds, the average ETF has a 0.39% annual expense ratio — far below the 1.31% charged by the average mutual fund. Competition among ETF providers is heating up, and bargain-basement funds are hitting the shelves. Notably, Vanguard S&P 500 ETF ($54; VOO) launched last month with a minuscule 0.06% expense ratio — below the 0.18% charged by the Vanguard 500 Index ($108; VFINX) mutual fund.

9 ATTRACTIVE ETFs
– % of Assets –
Exchange-Traded Fund
(Price; Ticker)
Est.
Yield
(%)
Weighted
Average
Quadrix
Overall
Overall
Above
80
(%)
Overall
Below
20
(%)
Exp.
Ratio
(%)
YTD
Total
Return
First Trust Morningstar Div.
Leaders ($15; FDL)
4.0
70
27
0
0.45
11.1
iShares Morningstar Large
Value ($56; JKF)
2.6
69
28
2
0.25
7.9
iShares Morningstar Mid
Value ($71; JKI)
2.9
59
20
7
0.30
12.2
SPDR Dow Jones Industrial
Avg. ($110; DIA)
2.4
72
43
6
0.17
7.8
SPDR Dow Jones Large
Cap Value ($61; ELV)
2.4
66
27
5
0.20
7.8
SPDR S&P Dividend
($51; SDY)
3.3
62
15
0
0.35
13.8
WisdomTree Dividend
ex-Fin’l ($45; DTN)
3.5
64
23
2
0.38
12.9
WisdomTree SmallCap
Dividend ($44; DES)
3.6
50
13
9
0.38
15.5
WisdomTree Total Dividend
($44; DTD)
2.8
65
27
3
0.28
8.9

While low expenses do not guarantee better performance, frugal funds have an easier time outperforming peers regardless of market conditions. In addition, a sizable and steady stream of income can enhance fund total returns, while providing a cushion not offered by non-dividend payers.

To that end, we identified nine attractive ETFs, all with very low expense ratios. All nine ETFs yield more than the S&P 500 Index’s payout of 2.0% and have outperformed the index so far in 2010. In addition, all nine earn weighted-average Quadrix® Overall scores of at least 50 and have sizable percentages of assets in stocks with Overall scores above 80. Two standouts are profiled below.

First Trust Morningstar Dividend Leaders ($15; FDL) offers a nice combination of low expenses (0.45%), lofty yield (4.0%), and high weighted-average Overall score (70). The ETF, heavily weighted in telecom and utilities, has risen 11% this year.


SPDR Dow Jones Industrial Average ($110; DIA), which charges only 0.17% annually, earns a weighted-average Overall score of 72 and yields 2.4%. Roughly 43% of assets are in stocks with Overall scores above 80.


Vanguard announced changes to its low-cost Admiral funds, allowing many investors to own shares once available only to well-heeled investors. Details in Portfolio Review.


FORECASTS FUND RECOMMENDATIONS
Through Oct. 12, our recommended Growth Portfolio has returned 9.4% for the year, versus 6.5% for its benchmark portfolio. The Conservative Portfolio has returned 8.9%, versus 6.8% for its benchmark.
— Year-to-Date —
—– % of Portfolio –—
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
American Century Heritage
($19; TWHIX)
16.4
A
8
9
88
Buffalo Growth
($23; BUFGX)
10.5
A
7
8
91
Dreyfus Small Cap Stock Index
($19; DISSX)
11.8
C
0
0
60
Fidelity Leveraged Co. Stock
($25; FLVCX)
7.9
E
0
0
37
Heartland Select Value
($27; HRSVX)
6.8
E
7
9
80
Heartland Value Plus
($26; HRVIX)
12.5
C
8
9
98
T. Rowe Price Int’l Discovery
($42; PRIDX)
13.2
D
5
6
70
T. Rowe Price New Horizons
($30; PRNHX)
16.5
A
8
9
97
Vanguard 500 Index
($108; VFINX)
6.5
B
5
5
61
Vanguard Dividend Growth
($14; VDIGX)
4.8
D
8
9
100
Vanguard Emerging Mkts.
Stock Indx. ($29; VEIEX)
13.6
C
0
5
88
Vanguard GNMA ($11; VFIIX)
7.4
C
5
0
88
Vanguard Inter.-Term Tax
Exempt ($14; VWITX)
6.1
C
0
0
76
Vanguard International Value
($32; VTRIX)
4.1
C
8
6
86
Vanguard Short-Term Invest.
Grade ($11; VFSTX)
5.7
B
0
0
81
Vanguard Total Bond Mkt. Index ($11; VBMFX)
8.4
D
15
0
74
Vanguard Total Int’l Stock
Index ($15; VGTSX)
6.9
B
6
6
93
Vanguard Wellesley Income
($22; VWINX)
10.1
A
0
6
99
Vanguard Wellington
($30; VWELX)
6.8
C
5
8
93
Wells Fargo Advantage High
Income ($7; STHYX)
11.7
C
5
5
54
* Year-to-date ranks through Oct. 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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