There's a problem with the dividend ETFs investors have rushed into, Goldman says

Published Fri, Jun 5 20201:26 PM EDTUpdated Fri, Jun 5 20201:30 PM EDT

Investors who rushed into dividend and low-volatility exchange-traded funds following the historic coronavirus-induced sell-off could be disappointed, according to Goldman Sachs. In a note to clients this week, the bank pointed out that ETFs aimed at giving investors exposure to dividend and reduced volatility don't rebalance fast enough to keep up with this year's wild market swings and companies cutting dividends. This has led such ETFs to underperform the market and makes them riskier than investors think, Goldman said. "While historically falling bond yields has tended to be a boon for dividend ETFs, this time has been different as the prospect of dividend suspensions and cuts has called into question the security of the income stream," wrote strategist Jessica Binder Graham. For example, the Vanguard High Dividend Yield ETF — which has seen its assets under management grow about 10% this year — is down more than 8% for 2020 while the S & P 500 is roughly flat. While the ETF is designed to capitalize on the underlying stocks' steady stream of income, it currently owns 40 companies that have suspended or cut their dividends. Some of those stocks include Ford Motor , Carnival and Nordstrom , all of which are down sharply for the year. "About half of the largest dividend funds have removed companies that have suspended or cut dividends this year," said Graham. "However, current holdings suggest that these funds still have holdings in these stocks suggesting the potential for further turnover in future months." Other popular dividend ETFs in the same position include the iShares Core Dividend Growth ETF ( DGRO ) and the Invesco S & P 500 High Dividend Low Volatility ETF ( SPHD ). DGRO is down about 4% for 2020 while the SPHD has fallen over 16%. Investors have also turned to ETFs that try to minimize volatility by acting like bond-market proxies, such as the Invesco S & P 500 Low Volatility ETF ( SPLV ). But Graham points out that these ETFs look less like bond proxies after rebalancing. "Low volatility has been an area that has had some of the strongest organic growth over the last 2 years," said the strategist. "However, this has started to reverse in recent months alongside a sharp move downward in relative performance." Because of its methodology and investment rules, the SPLV's exposure to real estate and utilities — considered among the least-volatile sectors in the market — was dramatically cut after a quarterly rebalance on May 15. Exposure to real estate fell to 2% from 15% in the SPLV while its utilities holdings went down to 6% from 28%. Instead, health care holdings within the fund rose to 25% from 5% while exposure to consumer staples rose to 23% from 11%. These changes "just how quickly holdings can change and have implications for how investors think about exposures, positioning and crowding," Graham said. — CNBC's Michael Bloom contributed to this report.

A pedestrian carries an umbrella while walking in front of the New York Stock Exchange, Feb. 26, 2020.

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Investors who rushed into dividend and low-volatility exchange-traded funds following the historic coronavirus-induced sell-off could be disappointed, according to Goldman Sachs.

In a note to clients this week, the bank pointed out that ETFs aimed at giving investors exposure to dividend and reduced volatility don't rebalance fast enough to keep up with this year's wild market swings and companies cutting dividends.

This has led such ETFs to underperform the market and makes them riskier than investors think, Goldman said.