Investors are scrambling to buy into ETFs that sport high yields, especially if the ETFs appear to be in more secure sectors of the economy. Any why not? ETFs (or stocks) that support long-term yields tend to have low volatility and higher value. They may not show major capital appreciation, but they are less likely to crumble under adverse market conditions.

There is a tendency, however, for investors to buy the yield and ignore the ETF. We see ads all the time that emphasize the dividend yield and virtually little more, as if a high yield is all we need.

The goal here is to describe the circumstances of ETF failures when the market corrects 30 percent or moves from its recent high. My contention is that a sharp fall differentially hurts ETFs that do not represent long-term social or economic macro-trends, or that are under-financed by the ETF providers. This simple logic suggests that when our present economic environment improves, the ETFs left standing will be stronger and more valued.   

LESSONS FROM THE DEAD AND DYING

Periodically the Wall street Journal (WSJ) publishes the performance of the top 15 yield-producing ETFs. They are listed under the title of Ways to Invest for Yield. The data reproduced here are from the January 29, 2008 issue. The key data are yield, price, and 1-day change. The yields are particularly high for ETFs, suggesting that these ETFs are good investments. But, are they? Can we read too much into the lucrative yields?

The following table lists the yield data from the WSJ list and is expanded and updated by adding price changes during the past 52 weeks, the current yield, and Beta, a measure of risk. Beta scores below 100 indicate lower than average risk and scores above 100 indicate greater than average risk.

In today’s market these dividend yields are substantial. Most of these ETFs are composed of financial stocks – banks, mortgage companies, REITS (commercial real estate), and insurance companies. There is one that involves crude oil (Ticker: DCR) and another that reflects short-term US Treasury (Ticker: SHV). All of these sectors have been under market pressures.

The extended table illustrates the weaknesses of these dividend ETFs.

• Ten of the ETFs show a drop in yields from the data published by the Wall Street Journal.
• Every one of the 15, except for the US Treasury Notes (SHV) shares a steep drop from its 52 week high.
• Eleven of the 15 ETFs show negative YTD returns (last 12 months)
• Several of the ETFs are new and untested. Many have not acquired Beta (risk) scores.  Those few with Beta scores are average or above average, suggesting that there may be above average risk.  

The bottom line is that even a shallow analysis of the fundamentals of these top-yielding ETFs does not promise the investor a substantial return on investment. They reflect the general troubles of the market and are in sectors of our economy that are showing disproportionate failures. The ETFs that represent these sectors are not, apparently, sustainable. The dividend payments are likely to be cut or terminated; most of the ETFs reflect a yield level that is history, many of these ETFs are too new to provide the investor with any confidence. 

YIELDS DO NOT ALWAYS REFLECT FUNDAMENTAL VALUES