Performance of Dividend ETFs During Bull and Bear Markets

Abstract

This study investigates the performance of Dividend Exchange Traded Funds (ETFs) during both bull and bear markets. We 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 we 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 also highly correlated with IVV. Over the entire period of our study, the performance of the Dividend ETF portfolio was marginally better than IVV; they marginally outperformed IVV during two bull markets (January 2004 – September 2007 and April 2009 – December 2014), but also marginally underperformed IVV during the most recent bear market (October 2007 – March 2009), which means that dividend ETFs are more volatile than IVV. Our sample period is limited due to the creation of the first Dividend ETF 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.

Keywords: Dividends, Investments, Exchange Traded Funds (ETFs), Investment funds, Investment analysis