Need Wisdom...Got Very Little - NOBL?

[JustShootMe]

First of all, forgive me if I screw something up here.  I've been a Lurker for a awhile, but this is my first ever Forum post (and I mean on ANY forum...).

I need some crowd-sourced wisdom....  (and thanks in advance for whatever responses I get.)

I've got a FA (Yes, I got one of those.  Forgive me)  trying to talk me into the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) versus the Vanguard Total Market Index Fund (VTAX).  His point is that NOBL is comprised of an index of companies that have paid increasing dividends over 25 years.  Less risky than a 'pure' index fund like VTAX. 

At this point I feel like the proverbial Unfrozen Caveman Investor, and want to just run into the hills and hide.  Something about ETFs makes me itchy but I can't really define why.  Probably, lack of understanding.  I generally try to avoid things I don't fully understand like ETF's, home brain surgery, and women.

How's the crowd feel about ETFs in general and NOBL in particular?

[Rob_bob]

Is this adviser a fiduciary or a sales guy/broker etc?

I use ETF's almost exclusively, they are basically a Mutual Fund that can be traded during the day rather than buying it at the days closing Net Asset Value like regular mutual funds.  Most but not all ETF's are passively managed, i.e. they don't actively trade stocks to try to out perform the market, many but not all mutual funds are actively managed.

NOBL is an okay fund.  A 5 year chart shows it's up just a touch more than SPY (S&P 500) and VTI Total US Market, but a 2 year chart shows it being a bit behind. Every adviser will have a slightly different perspective on what funds to use as you will get different opinions here.

If I were to buy just one fund to start with I would go with a total US market fund.  VTI has an expense ratio of  0.04% while NOBL is 0.35% so VTI is less expensive to own long term.

 

[Financial.Velociraptor]

I think Vanguard has a dividend growth index that probably has a lower expense ratio.  VDADX maybe?  It's been awhile since I looked.  Might have an ETF version as well you can buy through your broker.

I think there is a lot to be said for a dividend growth approach in most markets.  Today may not be one of those markets.  Low interest rates have caused a lot of former bond investors to "reach for yield".  Dividend payers and growers have been bid up as a result.   

EDIT: VIG is the ETF version of VDADX.  0.08% expense ratio.  Much lower than what your FA is recommending. 

EDIT 2: Linky: https://finance.yahoo.com/quote/VIG?p=VIG&.tsrc=fin-srch-v1

[jacoavluha]

NOBL has 53 holdings
VTI has over 3,600

Ask your advisor how the drastic reduction in diversification with NOBL results in less risk compared with VTI.

[Maenad]

Because I'm way too lazy to create a table for this, here's the sector weightings for NOBL and VTI (bolding mine):

Sector, NOBL, VTI
Basic Materials, 0.1128, 0.0278
Consumer Cyclical, 0.092, 0.1234
Financial Services, 0.09, 0.156
Realestate, 0.0192, 0.035
Consumer Defensive, 0.286, 0.0653
Healthcare, 0.1146, 0.1447
Utilities, 0.0188, 0.0278
Communication Services, 0.0186, 0.0295
Energy, 0.0357, 0.0575
Industrials, 0.2122, 0.1103
Technology, 0, 0.2226

I've bolded what appear to be the biggest differences - NOBL seems a lot heavier in Basic Materials, Consumer Defensive (food, beverages, household and personal products, packaging, or tobacco), and Industrials, and has no Technology at all.

This isn't surprising - the heavier-weighted sectors are usually older companies, which are more likely to have dividends. I think their price volatility has historically been lower than Tech, so they're seen as more "steady Eddies", and can help you avoid panicking and selling low during the next bear market.

NOBL isn't necessarily less risky, but it's likely less volatile, which is often easier to handle for folks who are more risk averse. Have you checked out Vanguard's tool for assessing your risk tolerance? That may help you to see where you are on that spectrum and give you an idea of where you should be investing. https://personal.vanguard.com/us/FundsInvQuestionnaire

I second the idea for checking out mutual funds at Vanguard and Fidelity for similar high-dividend offerings, and check the expense ratios. For NOBL, also add in your FA's fees (per trade? assets under management?) to add to those expenses.

It's kind of a slog going through all those numbers, but it also helps you learn, which is good!

[MustacheAndaHalf]

It's nice your adviser is suggesting a fund with only a 0.35% expense ratio, but VOO and VTI are better in both expense ratio and diversification.

Did your adviser mention that NOBL has trailed the S&P 500?  On both 3 year and 5 year performance.  NOBL hasn't been around long enough to have a 10 year track record.  You can look at morningstar.com's data on NOBL, and in the "performance" tab use the "Compare" function to see how it holds up against the S&P 500.

I disagree with your adviser about "less risky".  When a major crash occurs, those "25 years of increasing dividends" can get trashed in an instant.  Those companies can - and do - cut their dividends to nearly nothing in order to survive the crash.   Your adviser is probably used to more traditional thinking, rather than modern ideas of diversification and owning the market.

[terran]

Some (like this guy) would say that dividends are just forced distributions that create a taxable event. You want less dividends, not more. You can always sell when you need money and pay the taxes when you want rather than when the company wants to make distributions.

[JustShootMe]

Thanks very much for all the responses.  Lots to chew on.

Rob_bob, my FA is a Fiduciary.  However, I think he see's life through the lens of an active fund manager.  (when all you have is a hammer, the world starts looking like a lot of nails....)

Velociraptor, I will look onto the VIG fund.  Like that 0.08 much better than 0.35!

jacoavluha, that was my first question as well.  I can't see how more diversification can be anything but good.

Maenad, I appreciate all the data.  My FA is a free service of the bank I'm with, so no added fees for his help.  I will definitely check out the Vanguard risk tool.  Thanks.

MustacheAndaHalf, I think you're right about my FA's thinking. 

terran,  good point about distributions being 'forced' versus the freedom of just selling when you need. 

Wow.  Lots of good stuff for me to research/ponder.  Again, thanks so much for everyone's help.

Now, the research begins.   Cheers!

[jacoavluha]

Paraphrasing from Taylor Larimore of bogleheads fame:

Ask your advisor, "I have heard that the average index fund beats the average managed fund. Is this true?"

(NOBL is a managed fund.)

If he/she disagrees, they're either A) stupid, B) a liar, or C) both. It's just math.

https://web.stanford.edu/~wfsharpe/art/active/active.htm

[Dee18]

I would ask the FA if he receives any sort of benefit if you invest with Noble.

[JustShootMe]

Dee_18

Nope.  He doesn't get anything from NOBL.  Of that I'm sure. 

I hope I didn't make it sound like he was totally against the Vanguard Total Market Index Fund.  He just like NOBL better.  He did like the low 0.04%! 

Basically, I don't think his advice is malicious in any way.  He just has a different view than I think most on this forum have - including me.

Cheers!

[LetItGrow]

Sounds like you are well on your way to going at this alone. A little more reading and you'll be ready to ditch the FA and be better off, assuming you apply what you learn.

This NOBL fund seems silly and increases risk with little to show for it. GE would have been in there for decades until 09 or whenever, along with a bunch of others. Like terran said, dividends are forced taxable actions, when in taxable account of course, and as our stache grows I am starting to desire fewer and fewer. Even from VTSAX, I'd like to have more control to plan taxes better.

[COEE]

Did your adviser mention that NOBL has trailed the S&P 500?  On both 3 year and 5 year performance.  NOBL hasn't been around long enough to have a 10 year track record.  You can look at morningstar.com's data on NOBL, and in the "performance" tab use the "Compare" function to see how it holds up against the S&P 500.

You're looking at individual dates, and not looking at the bigger picture, resulting in selection bias.  This fund does do a reasonable job at tracking its index.  Sometimes it's higher, sometimes its lower (presumably due to the heavy tilt toward a small number of high dividend paying stocks).  However, I believe it meets its stated objective of being a high dividend paying S&P 500 fund.  It does not track as closely as the Vanguard S&P 500 fund, but they are still reasonably close.

chart #1

I will echo Terran's thoughts:  Dividends don't usually actually benefit the investor.  Why do you want a dividend paying mutual fund?