What Is the Fidelity High Dividend ETF, and Who Should Buy It?

Investing in dividend stocks can be a good plan for people who want to earn steady income from their stock holdings. High-yield dividends often come from well-established, consistently profitable companies. If you want to avoid volatile growth stocks or put your money into parts of the market that might be less exposed to a possible downturn in tech stocks, buying high-yield dividend stocks can be a good strategy.

The Fidelity High Dividend ETF (NYSEMKT: FDVV) is a dividend stock ETF that invests in large- and mid-cap stocks of companies that are expected to continue to pay and grow their dividends.

Here are a few key details about the Fidelity High Dividend ETF.

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FDVV: 112 holdings, but still tech-heavy

The Fidelity High Dividend ETF has 112 holdings, making it less diversified than many other ETFs. The fund's dividend yield is 2.8%, and it charges an expense ratio of 0.15%.

Like many dividend ETFs, this fund offers decent sector diversification. Its holdings include 26.7% information technology stocks, 18.9% financials, 14.5% consumer discretionary, 11.3% consumer staples, and 9.2% utilities.

But the top four holdings (as of April 30) are all major tech names: Nvidia, Apple, Microsoft, and Broadcom. These four tech stocks make up about 20.5% of the fund. If you're looking to diversify away from tech stocks, this dividend fund might not be the best choice.

Underperforming the S&P 500

The Fidelity High Dividend ETF was launched in September 2016. During that almost 10-year track record, it has delivered average annual returns (by net asset value) of 13.3%. That might sound like a solid return on investment.

Unfortunately, the S&P 500 index has done even better. If you had invested $10,000 in FDVV on its inception date, today you'd have about $23,540. But if you had invested $10,000 in an S&P 500 index fund instead, today you'd have about $33,790 -- a 44% higher return.

FDVV data by YCharts

This fund has also underperformed the S&P 500 year to date and for the past five years. Past performance doesn't guarantee future results, and this fund might rally and outperform the market in the years to come. But a dividend-focused fund that is top-heavy with tech stocks seems like an odd choice for most investors. This fund doesn't rank among the best dividend ETFs.

What should you buy instead? If you want lots of tech stocks, buying a Nasdaq-100 ETF could be a better strategy. If you want more value-oriented stocks that pay high dividends, other dividend ETFs could be a better fit. Or if you want more diversification, choosing a low-cost total stock market index fund might help you avoid the risks of investing too heavily in any one industry or type of stock.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Broadcom, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.