What You May Have Missed This Week...

If there's one dividend ETF in the marketplace that has captured investors' admiration, it's probably the Schwab U.S. Dividend Equity ETF (SCHD). Unfortunately, it’s stumbled over the past couple of years as tech and the magnificent 7 dominate the market and the fund finally experiences its first real stretch of underperformance. SCHD's all-around approach fits into investors' portfolios as well today as it ever has.

It also makes for a unique investment "problem". How do you build around a dividend ETF that already touches on every major strategy?

The highest rating, five stars, is awarded to a small handful of funds that have historically outperformed their category peers on a risk-adjusted basis. This rating system is a useful tool for investors looking to identify funds that have demonstrated superior performance.

Here’s a look at three five-star ETFs that are on my personal watchlist.

Unfortunately, if you want a well-rounded dividend portfolio, VIG isn't enough. Its dividend growth strategy works well in most portfolios, but it de-emphasizes other critical components, such as high yield and dividend quality.

Simply put, you need to augment a portfolio position in VIG with other dividend ETFs.

I want to see funds that have outperformed on both an absolute and risk-adjusted basis because that’s where the real alpha is achieved. Conversely, funds that lag on those measures will fall into the “struggled” category.

I’m going to pick three ETFs in each category and offer my thoughts on why they have or have not had success so far in 2024.

For a lot of investors, the Invesco QQQ ETF (QQQ) is probably the biggest position in their portfolios. Often mislabeled as a tech ETF, QQQ actually has nearly half of its portfolio invested in non-tech companies, including double digit allocations to the communication services and consumer discretionary sectors as well as 4-6% weightings to industrials, healthcare and consumer staples.

There's no doubting its popularity among ETF investors. There may, however, be a better option! That would be the fund that's it's virtual twin - the Invesco Nasdaq 100 ETF (QQQM).

If you've diversified your portfolio beyond stocks and into fixed income, odds are you own (or have at least considered) a total bond market ETF. Like an S&P 500 or total market fund for equities, total bond market ETFs give you the ease and simplicity of getting everything in one place for a razor thin expense ratio.

The problem is that you're probably not getting everything.

Many investors may assume that the two are interchangeable when choosing one or the other for your portfolio. For some, that may not necessarily be the case. Since both ETFs track the S&P 500, there's essentially no difference in what's in the portfolio. The differences, if there are any, usually exist on the fringes.

In a marketplace of more than 160 dividend ETFs, it might be surprising to know that Vanguard, one of the kings of the industry, has only four of them. Some issuers choose to broaden their lineups through overly niche or targeted strategies, but Vanguard keeps it really simple - focus on broad diversification across popular dividend income themes and offer them as cheap as possible.

As a result, that quartet of dividend ETFs have become leaders in their respective spaces.