Adviser Soapbox
The 'West Coast' ETF Offense
Carl Delfeld, 11.17.06, 6:25 PM ET
Former San Francisco Forty-Niners’ coach Bill Walsh is known for his low-risk high return West Coast offensive strategy, which yielded high returns indeed. From 1984 to 1989, San Francisco had a 75.7% winning percentage and won three Super Bowls. Walsh noticed that short passes to backs and receivers led to a much higher completion rate and, just as important, more than half the yards gained from each completion were from running after the catch.
In the world of investments, think of dividends as these short pass completions and the capital appreciation from re-invested dividends like running down the field after the catch.
Most are obsessed with the low probability deep passes. In football, you’d call them the long bombs; in investing, they’re the ten-baggers. In fact, since 1926, dividends and their growth from reinvestment accounted for about half of total stock market returns.
Even in regions like Asia where countries like Japan have companies with historically low dividend yields, dividends are responsible for a substantial portion of total investment returns.
A vast majority of the 300 or so ETF baskets on the market follow the conventional market cap strategy of weighting companies in the basket by their market value. This means that the big companies like Exxon Mobil, Coca-Cola and General Motors get more of your investment in an ETF than companies that are smaller.
WisdomTree ETFs are the exception to the norm because they weight companies in their ETF baskets by a company’s record of paying cash dividends. Investors thus capture this dividend stream and also gain a sell discipline since company weightings are rebalanced based on annualized quarterly dividend yields.
The goal for football coaches is to get the maximum output from each player on the team. The goal for investors is to get the highest return for each dollar invested with minimum risk. Both the West Coast offense and the Wisdom Tree dividend-based strategy may deliver the best risk-adjusted returns.
As the current bull market enters into what many believe to be the fourth quarter of the game, focusing on a dividend strategy may be especially important. In the early stages of a bull market, dividend-based ETFs might lag market-cap weighted ETFs as the big growth companies roar ahead, but late in the game the roles will likely reverse, with high dividend-payers outperforming the market.
In addition, a reduction in cash dividends, like a quarterback’s performance stats, is often times a signal of a company’s future sub-par returns. When Ford recently slashed its dividend, it was cut from some WisdomTree ETFs.
In a short time, WisdomTree has unleashed an interesting blend of ETFs from the Total Dividend (DTD) to the International SmallCap (DLS) to the Japan High-Yielding Equity (DNL) ETF. It is also taking dead aim at the ETF market leader iShares team, and it is strengthening its bench by filing for more than 30 new ETFs including a few for emerging markets and some country-specific ETFs like the first ETF for India.
Competition in the ETF world is great for investors and the Chartwell ETF Advisor. We are following the game closely and will soon add a Dividend Focus ETF portfolio to our existing six model ETF portfolios.
Just like you don’t need huge offensive lineman to utilize the west coast offense, you don’t need big bucks to benefit from investor friendly dividend weighted ETFs.
