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Monthly-pay dividend ETFs: Are you overexposed?

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What we're looking at

A popular category of exchange-traded funds that invest in the shares of dividend-paying companies and distribute dividend income to investors on a monthly basis.

Our screen

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Yves Rebetez of ETF Insight has taken all the TSX-listed monthly pay equity ETFs and ranked them by assets. Also shown is the sector exposure for each ETF. Compare the sector weightings of these ETFs with your current holdings before buying. That way, you avoid ending up with too much exposure to any one sector.

What we found

The popularity of the funds in today's screen can be seen in the fact that their combined assets comes in around $6.5-billion. But how many investors have bothered to look at exactly what they own in their monthly pay dividend ETFs?

Notice the extent to which financial stocks dominate some of these funds. That's understandable because banks have long been a dividend staple in Canada. Problem is, financial stocks account for one-third of the S&P/TSX composite index and, as a result, they're bound to be a big holding as well in ETFs and mutual funds that offer broad Canadian market exposure. If you partner one of these funds with a dividend ETF based primarily on banks, you could be seriously affected if there was a downturn in the financial sector.

Mind your exposure to energy stocks as well if you're using monthly pay equity ETFs. Energy is the second-largest sector on the TSX, and it's a big holding in a few monthly pay ETFs as well. Another sector to keep an eye on in monthly pay dividend ETFs is utilities. While not a dominant TSX sector, utilities stocks would come under pressure when interest rates rise.

Finally, it's worth noting that some of the most widely diversified monthly pay equity ETFs focus on the U.S. stock market.

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