Over a 24-hour news cycle, we hear the doom and gloom regurgitated ad nauseam…
The eurozone is on the brink of disaster, breakup and bankruptcy… The United States is in for another recession in 2013… Corn production is drying up and food prices are going to skyrocket during the worst drought in a half-century… The slowdown in China is getting worse, battering imports and stifling recovery across the globe… And on and on and on…
By the sound of it, if it’s not apocalypse now, it’s apocalypse tomorrow.
The waves of negativity are hardly surprising, of course. Fear sells, the public eats it up and, in turn, investors react.
Never mind that we’re in a three-year bull-market rally, the U.S. economy is actually expanding and real estate is turning around.
According to a new ETF-focused study by Nicholas Colas, Chief Market Strategist at ConvergEx Group, some investors couldn’t care less. And they’re losing out big time because of it.
The study tracked ETFs over the last three years and shows that most of the money has been flowing into the worst-performing ETFs, while the best performers are getting short-changed.
Why? Top performers are all upside ETFs and “the money flows are strongly towards… downside names,” says Colas, quoted in Yahoo!’s Breakout.
He adds, “Folks [are] worried about downside scenarios. So they’ll buy the bearish doubles, the bearish triples, and that’s why those names continue to have relevance even though their absolute performance over three years is very poor, down 85 to 90%.”
The top performer, Direxion Daily Real Estate Bull 3x Shares (NYSE: DRN), returned 468% for investors over three years, yet lost $47 million in cash flow. Compare that to the worst performer, Direxion Daily Real Estate Bear 3x Shares (NYSE: DRV), which was off 98%, but cash flow hit $170 million.
These counterintuitive figures are reflected across the board, too.
Despite the fact that the worst 30 funds on average returned a loss of 83%, they still attained $14 billion in capital. The best 30, on the other hand, achieved excellent average returns of 142%, but cash flow came in at only $5.5 billion. The top 10 actually lost assets.
Admittedly, these are the extremes, making up “the best and worst 3% of the ETF/ETP universe that have made it to their three year anniversaries,” says Colas. So it’s not a fair characterization of investor behaviors as a whole.
(Note: Wall Street Daily’s Karim Rahemtulla has pointed out the dangers of leveraged ETFs in general, so take heed.)
Even so, there’s a lesson here: Put your money into proven, long-term performance, not shortsighted headlines. And in the spirit of that lesson, here are two dividend ETFs that are solid performers regardless of the sentiments de jour…
SPDR S&P Dividend ETF (NYSE: SDY)
This fund tracks the S&P’s High-Yield Dividend Aristocrats, composed of the 60-highest yielders on the S&P 1500 that have raised dividends every year for at least 25 years.
The 7% total return for SDY lagged slightly behind the S&P 500’s 13% this year. But over the last five years, it showed its value as a longer-term investment – returning an average of 2.9% compared to the S&P 500’s 1.9%.
The fund has a dividend yield of 3.1% and a modest expense ratio (the percentage of your investment that goes toward fund management) of 0.35%, which is on par with other dividend ETFs.
Vanguard Dividend Appreciation ETF (NYSE: VIG)
VIG can be considered a dividend growth fund. It’s currently less focused on yields than it is on quality companies that’ll pay off down the road. (Companies with high leverage and poor cash flow don’t make the cut.)
As a result, the yield comes in lower than SDY at 2.09%. But because its portfolio is strong and diverse, it’s comparatively more resistant to market downturns: Over the last five years, VIG fared better than both the S&P 500 and SDY, returning an average of 3.2%.
VIG also sports a low expense ratio of 0.13%, which goes toward making up for its lower yield.
Bottom line: While “splendid” is rightly the last word that comes to mind when thinking about the outlook of the global economy, don’t let the media browbeat you into throwing your money at bad investments. There’s always a levelheaded, reasonable middle ground between the doomsayers and the Pollyanna-ish bulls. The two ETFs above are a great place to start.