First Trust, the Wheaton, Illinois-based issuer with more than 72 ETF products that is behind the popular AlphaDEX series of exchange traded funds, has become the first company to try tapping into two relatively new investment trends; dividends and technology stocks.
Since dividend paying tech stocks are a rarity, after all tech giants like Adobe, EMC and Google don’t have a history of paying dividends and Apple has just started to loosen its purse, TDIV tries to fill in the gap by providing a simplified way to gain targeted access to dividend-paying technology companies.
TDIV tracks the technology companies that pay dividends by replicating the NASDAQ Technology Dividend Index, a benchmark that comprises of NASDAQ or the NYSE listed telecom and tech stocks that have paid regular dividends for the past twelve months with a minimum dividend yield of 0.5 percent and have not been issued by firms currently in bankruptcy proceedings.
Each security also must have a market capitalization of $500 million and have a minimum dollar trading volume of $1 million. Technology stocks make up for about 80 percent of the fund while telecom stocks make up for the remaining 20 percent. According to Moody’s, technology firms are expected to pay $26 billion in dividends in 2012 and TDIV intends to give investors access to the dividend pie of technology companies. Also research by First Trust shows dividend of technology companies have grown the most over the past seven years at an annualized rate of about 16.5 percent per year.
The fund includes about 60 securities with the top seven spots occupied by behemoths like Qualcomm, Microsoft, IBM and Intel, suggesting TDIV can be relatively top heavy with higher concentration in large caps.
However, to prevent higher concentration of larger stocks, the underlying index utilizes caps and re-balances holdings every quarter. TDIV also invests in securities of non-US issuers, usually in the form of ADRs and GDRs.
Though it’s difficult to predict whether the robust dividend growth of the past will be sustained in future, the truth is most dividend paying portfolios are light on tech firms, indicating TDIV can be an interesting compliment to a wide range of portfolios. However, you must be aware that due its limited exposure, TDIV is classified as a non-diversified fund. The fund has an expense ratio of 0.5 percent.
Here again, due to its newness and lack of volume and historical data, I will track TDIV for a number of months before being able to run comparisons to other dividend paying ETFs and will follow up at that time.
Disclosure: No holdings