Bark At The Dow's Dogs With These ETFs

January 4, 2012 1:40 pm
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The start of a new year brings an opportunity to participate in a simple, yet potent investment theme: Investing in the dogs of the Dow Jones Industrial Average. It’s as easy as purchasing an equal-weight basket of the Dow’s 10 highest yielders and it works.

In 2011, the strategy delivered a 12.2% gain, but that number jumps to 17.2% when accounting for dividends and that beats the 4.6% increase for the Dow overall, according to Canaccord Genuity.

With their yields as of December 30, 2011, here are the 2012 Dogs of the Dow: AT&T (NYSE: T) – 5.82%, Verizon Communications (NYSE: VZ) – 4.99%, Merck (NYSE: MRK) – 4.46%. Pfizer (NYSE: PFE) – 4.07%, General Electric (NYSE: GE)  – 3.80%, DuPont (NYSE: DD) – 3.58%,  Johnson & Johnson (NYSE: JNJ) – 3.48%, Intel (Nasdaq: INTC)  – 3.46%, Procter & Gamble (NYSE: PG) – 3.15% and Kraft Foods (NYSE: KFT) – 3.10%.

That looks like a portfolio that Warren Buffett would like. In fact, Berkshire Hathaway (NYSE: BRK-A, BRK-B) owns equity positions in GE, Intel, Johnson & Johnson, Kraft and Procter & Gamble.

Sounds good, but can investors do better with ETFs? Let’s find out by examining the following ETFs for Dogs of the Dow exposure.

Consumer Staples Select SPDR (NYSE: XLP)
With P&G and Kraft combining for over 19.5% of XLP’s weight, we certainly have one avenue for ample Dogs of the Dow exposure. We also have a split decision. In the past year, XLP has handily outperformed P&G and the Dow, but the ETF has also been sharply outpaced by Kraft.

ELEMENTS DJ High Yield Select 10 ETN (NYSE: DOD)
Guess what “DOD” stands for? That’s right. Dogs of the Dow. As ETFdb notes, DOD isn’t the most popular ETN on the block. It’s roughly five years old with about $5 million in AUM. However, the ETN has done its job and done it well, easily outpacing the Dow in 2010 and 2011. Obviously a good idea for those that don’t want to own all 10 Dow dogs directly.

Market Vectors Pharmaceutical ETF (NYSE: PPH)
You probably don’t need to own Johnson & Johnson, Merck and Pfizer all at once on an individual basis, but if you like all three, they account for nearly 20% of the weight of the Market Vectors Pharmaceutical ETF. PPH recently converted to a traditional ETF from a HOLDRs fund, and with expectations in place for another year of solid pharmaceuticals returns, the fund could be one to watch regardless of whether an investor needs Dogs of the Dow exposure.

iShares Dow Jones US Telecom ETF (NYSE: IYZ)
The iShares Dow Jones US Telecom ETF, along with comparable funds, weren’t stellar performers in 2011 and that helps explain why AT&T and Verizon are back for another round as Dogs of the Dow. For those looking to play a telecom rebound, IYZ is a sound bet as AT&T and Verizon account for over 31% of this ETF’s weight. Plus, the ETF yields over 3%.

iShares High Dividend Equity Fund (NYSE: HDV)
If DOD isn’t your cup of tea, try the iShares High Dividend Equity Fund (NYSE: HDV). Six of the 10 Dow dogs are found in the top-10 holdings of this stellar dividend ETF. DuPont, Kraft, P&G and GE are the dogs not featured at all in HDV.

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