Virginia Munger Kahn in the New York Times writes that investors are flocking to exchange traded funds (ETFs) that are focusing on dividend income. One reason why ETFs may be preferable to open-end funds is their (generally) lower expense ratio:
“The fund industry has sabotaged its ability to produce a meaningful tax-advantaged dividend stream to investors,” Mr. Phillips said. “The beauty of E.T.F.’s and index funds is that they don’t have distribution costs embedded in their expenses and they have lower management fees because they are passively managed.” As a result, he said, “much less of the privileged income stream is eaten up by expenses.”
There are a number of issues for investors, including the fact that there are a number of ETFs that follow a dividend-focused strategy. However, investors should not allow the quest for dividend income to overcome the goal of total returns:
INVESTORS should also consider that dividends and yield, by themselves, may not make a fund worthwhile. A fund whose stock investments are rising in value can provide a better total return than a fund whose stocks are not rising at all, said Russel Kinnel, director of mutual fund research at Morningstar.
“You want to look for a fund with good management, a good strategy, and low costs first and recognize that your future income stream will be affected by your returns,” he said.