These three ETFs scream “sell.” Should you?

Exchange-traded funds (ETFs) have been around for 32 years in the US, and I’ve been exploring and investing in them the whole time. As a result, I have developed some biases about the ETF landscape, as well as some discomfort with the behavior of the investors surrounding them. Dividend ETFs bring a lot of these things.

An example of this is the current situation of investing to achieve a high dividend yield. To be clear, “high yield” is different to me from investing in dividend stocks for growth, using dividends as the primary signal that the business is stable. It is easier to manipulate dividends within the rules than it is to pay dividends. The first is accounting, timing of revenue recognition, etc. The last is a cold cash payment, every three months, to shareholders.

So, in this case, I’m talking about investing in stocks to make a return, like people traditionally invest in bonds. Stocks have greater upside potential, but for many investors, especially my fellow retirees, there has been an almost obsessive drive to make money each quarter, as much as 3% or much more, from dividend-paying stocks.

Reducing the stock price by paying a dividend is one thing. But the fact that many classic dividend stocks have produced little or no return beyond dividends is, in my view, underreported and underappreciated. This has been going on long enough for me to want to call the whole thing off. And look ahead.

There was a time when getting a 3% or 4% dividend yield made sense. But that happened when inflation was near zero, and so were Treasury and bond prices. This is no longer the case. So, if I’m going to pile into stocks that yield less than Treasury bills, I might as well get some price appreciation afterwards. More than a few percentage points per year, ideally.

This did not happen. Check out this collection of three different courses on the high-yield dividend approach. In fact, both the Vanguard High Dividend Yield ETF (VYM) and the iShares Core High Dividend (HDV) have “high dividends” to their name, and the third, the Invesco Dow Jones Industrial Dividend ETF (DJD), is a Dow Jones 30 (DOWI), weighted by dividend yield, except for stocks in this index that do not pay a dividend.

Here is a comparison shot between them. Notice the yields are lagging the market this year, but more importantly the dividends are trending down the scale. There are several S&P 500 (SPX) stocks in this return range, but they haven’t done well during this frenzied AI rally, which just celebrated its third anniversary.

This is not to say that ETFs have performed poorly. However, if we look between the periods of performance highlighted above, we see that they have been consistent laggards to the upside, but are not a great source of defense when technology-driven market leaders falter. This tells me that it may not be the stabilizing force investors need when that happens.

This is not new to many investors. The market falls in unison more than it picks winners and losers in a stock rout. Blame the algorithms and index funds… not the investing book!

These stocks are basically cheap. All three of these ETFs feature trailing price-earnings ratios in the low-to-mid teens. Their beta is about 80% of the S&P 500.

But losing less while getting a small dividend yield is not for me. So I didn’t play along. That’s not to say there aren’t some potential stock winners within ETFs. But as I see it, trying to keep things simple by buying dividend stocks in bulk through an ETF is riskier than I remember ever being.

The graphs for these are all quite similar, so I’ll use the largest triple-cap ETF to represent them. What I’m seeing here, in a weekly view, are early signs of a problem. The 20-day moving average is swinging after recovering from the April lows, and the Price Volatility Percentage Volatility (PPO) indicator looks as it did before previous significant declines.

I will continue to seek income from US Treasuries, alternative total return, investing in hedged stocks, and strategies such as options collars.

My message to those who might be satisfied with modest income from ETFs is this: Know what you have, and consider that it may not perform as well in the future as it did in the past.

On the date of publication, Rob Isbitts had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data contained in this article are for informational purposes only. This article was originally published on parchart.com