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An ETF that distributes dividend at 5% is rated only 1-star by Morningstar and considered low return on a historical level (by a different matrix).

However, when looking at the chart in 2017, the NAV seems relatively stable at $20. This year so far NAV also stays largely unchanged. Doesn't this mean if I purchase the ETF and hold it for a year, I will likely get a 5% return, assuming within the coming year there is only minimal (not impactful) fluctuation in the NAV.

If correct, since 5% return isn't too shabby, why does it only get a 1-star rating by Morningstar? I understand many other ETFs get a better return but most of those don't pay dividends. Thus their returns are strictly the results of increased value in the underlying assets. However, with this volatile environment, I think a 5% return should not be considered 1-star?

What am I missing?

  • If by 'return' you mean Total Return then you are confusing Yield with Total Return. Dividends do not provide Total return. Only share price appreciation does. – Bob Baerker Sep 30 '18 at 3:35
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    @Bob, if NAV stays the same at the end of 12 months, given that this is a dividend-paying ETF, doesn't it mean the total return is 5% (from the dividend) as there is no increase or decrease of the value of underlying assets ?? – B Chen Sep 30 '18 at 4:09
  • B Chen 7 - I assumed that this is an equity ETF (possibly wrong on my part) since you mentioned dividends. If this is fixed income, ignore this. Stock exchanges reduce share price by the amount of the dividend on the ex-dividend date which means that the ex-dividend process does not produce Total Return. When share price returns to the closing price before the ex-div date (share price appreciation), you can then sell the asset for what it was worth before the dividend and the dividend is now true income. Total Return = Dividends + Interest + Capital Gain. – Bob Baerker Sep 30 '18 at 12:20
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There wasn't a volatile environment in 2017, it was extremely low volatility to the point that inverse-volatility funds were among the highest performers (until they were wiped out in February 2018).

5% return in 2017 would put that near the bottom of all stock funds, performance-wise.

Since the ratings are given relative to the category, it's expected to receive a low rating if many other funds in the same category (and similar risk profile) did much better. For comparison, a dividend fund that returned 16% in 2017 earned a 5-star rating.


For an analysis that's not merely comparison to other funds, a 5% yield with no loss of asset value sounds great in light of advice to live off of 3-4% of savings.

But that requires your investment to return 3-4% adjusted for inflation, and to do so in an average year. A fund that returns 5% in a roaring bull market deserves every bit of its 1* rating. (The exception might be if it is heavily hedged and expected to perform better in a bear market. But even consistent performance of 5% is not good enough to overcome the drag of inflation; it has to do better than that most years.)

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Without knowing any specifics on the ETF it is likely filled with risky stocks.

Investors like to be payed for higher risk. Stocks with a higher dividend tend to be higher risk stocks. If the ETF is made up of risky stocks, they will yield a higher dividend.

Another less likely explanation could be that Morningstar is wrong/outdated etc.

  • @ billy - clearly it's likely that some underlying assets are high risk, which is why it is not a good ETF for long-term investment. However, even without the specifics, if we are simply looking at what transpired in 2017, the ETF NAV stayed largely unchanged. Now looking forward, if for a short-term 1 year investment, if NAV were to stay still around $20 (+/- 0.1% fluctuation), the 5% dividend would generate a 5% (+/-0.1% added value) return. Is this correct? – B Chen Sep 30 '18 at 4:15
  • Before accounting for expenses, taxes, etc, and assuming the NAV doesn't change yes. However if that last assumption holds up is a question for debate. If the assets are full of risk, and they lose value next year say 10, 20, 30, 40%, you get paid 5%, you are still down for the year (unless you wait till if and when it goes back up). – user75979 Sep 30 '18 at 4:47
  • thanks for clarification. certainly if the underlying assets lose value, 5% dividend may mean nothing. But hypothetically, considering that 2017 data indicated a flat NAV, I am assuming 2018 NAV remains unchanged, so 5% return on investment (pre-expense, pre-tax) – B Chen Sep 30 '18 at 5:02
  • Analysis might be eaiser if you posted the ETF's symbol. – Bob Baerker Sep 30 '18 at 14:48

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