Performance of Dividend Exchange-Traded Funds during Bull and Bear Markets

Abstract

This study investigates the performance of dividend exchange-traded funds (ETFs) during both bull and bear markets. The authors compare their performance to a proxy for the U.S. market as measured by the S&P 500 ETF (IVV). Using data from Morningstar Direct, they construct equally weighted portfolios of dividend ETFs and compute their absolute and risk-adjusted returns for the period 2004 through 2014. The study finds that dividend ETFs are much more expensive than IVV and are highly correlated with IVV. Over the entire period of study, the performance of the dividend ETF portfolio was marginally better than that of IVV; the portfolio marginally outperformed IVV during two bull markets (January 2004 to September 2007 and April 2009 to December 2014), but it also marginally underperformed IVV during the most recent bear market (October 2007 to March 2009), which means that dividend ETFs are more volatile than IVV. The sample period is limited because the first dividend ETF was created in late 2003. Investors in dividend ETFs, who were expecting to receive superior returns during volatile markets, would not have achieved the results that they anticipated.

TOPICS: Exchange-traded funds and applications, portfolio construction, performance measurement