The ‘Dogs of the Dow’ might seem interesting investments to many investors thanks to their historical outperformance. The strategy of the Dow Dogs proved beneficial for eight times over the past 14 years when it outpaced DJIA.

Though Dow Dogs has clearly beaten DJIA returns including dividends in 2014, the concept lagged the benchmark by a slim margin of 50 bps in terms of market performance. The underperformance came despite massive gains of nearly 40% for Intel (INTC), and about 24% for Microsoft (MSFT) and Cisco Systems (CSCO) each. Notably, Chevron (CVX) was the worst performer of the Dow Dogs, losing more than 10% due to the oil price collapse. General Electric (GE) was also hit the hardest while Verizon (VZ) and AT&T (T) lost due to an intense price war.

The Dogs of the Dow represent the 10 highest yielding blue chip companies of DJIA that are near the bottom of their business cycle and thus have higher dividend yields (due to depressed stock prices). The attractive dividend yield suggests that the stocks are in the oversold territory and will rebound faster than any other stock when the business cycle changes.

Given this, honing in on the stocks that are cheaper than their peers and are unlikely to cut dividends could generate above-market returns over the one-year period along with juicy yields (read: 3 Ultra Cheap Value ETFs for Long Term Outperformance).

Since the solid gains for INTC, MSFT and CSCO could reduce the relative attractiveness of their yields in 2015, Caterpillar (CAT), Exxon Mobil (XOM) and Coca-Cola (KO) replaced them as Dow Dogs. The other seven Dogs include AT&T, Verizon, Chevron, GE, McDonald’s (MCD), Pfizer (PFE), and Merck (MRK).

However, the performance of the Dow Dogs differs from bull to bear markets and investors need to take great caution while investing in these companies. Still, investors looking to invest in these stocks could do so in the basket form via ETFs with lower risk. Though there are several products that offer exposure to the Dogs of the Dow, we have highlighted some exciting choices that could outperform in 2015:

ELEMENTS DJ High Yield Select 10 ETN (DOD - ETF report)

This is an ETN option and provides investors pure play to the 10 highest dividend-yielding securities in DJIA in equal proportions. It closely replicates the Dow Jones High Yield Select 10 Total Return Index and charges 75 bps in annual fees. The note has amassed $33 million in its asset base while trades in light volume of around 19,000 shares on average daily basis. DOD returned nearly 11% in 2014.

ALPS Sector Dividend Dogs ETF (SDOG - ETF report)

This fund applies the ‘Dogs of the Dow Theory’ on a sector-by-sector basis using the S&P 500 (SPX). This could be easily done by selecting the five highest yielding securities in each of the 10 GICS sectors and equally weighing them. These higher yielding stocks will appreciate in order to bring their yields in line with the market, potentially leading to outsized gains (read: 3 Unbeatable Dividend ETF All-Stars for Your Portfolio).
 

This approach results in a portfolio of 51 stocks with each security accounting for less than 2.3% of total assets. The fund focuses on yield in the large cap market while giving investors roughly equal exposure to all sectors. SDOG has accumulated $1.1 billion in AUM in just two years of its inception and trades in good volume of more than 157,000 shares. It charges 40 bps in annual fees and has an annual dividend yield of 3.36%. The ETF was up over 16% in 2014.

iShares High Dividend ETF (HDV - ETF report)

This product provides exposure to 75 dividend stocks by tracking the Morningstar Dividend Yield Focus Index. The nine Dogs of the Dow account for more than half of the portfolio, suggesting that these Dogs dominate the returns of the fund. From a sector look, the fund is well spread out with double-digit exposure to energy, consumer staples, telecom and utilities.      

HDV is among the largest and most popular ETF in the large cap space with AUM of about $5.2 billion and average trading volume of over 412,000 shares. It charges 12 bps in fees per year and gained nearly 14% last year. The fund has an annual dividend yield of 3.20% (read: 3 Top Performing Dividend ETFs to Watch in 2015).

First Trust Morningstar Dividend Leaders Index Fund (FDL - ETF report)

This fund follows the Morningstar Dividend Leaders Index with AUM of $985.1 million in its asset base. In total, the fund holds 99 stocks with four Dogs of the Dow dominating the fund’s holding with a combined 35.6% of assets. From a sector look, utilities, telecom, energy and consumer staples each take double-digit allocation in the basket.     

Volume is good as it exchanges nearly 197,000 shares a day on average while expense ratio came in at 0.45%. The fund added over 14% in 2014 and has a dividend yield of 3.35% annually.

Vanguard Telecommunication Services ETF (VOX - ETF report)

The telecom sector has the highest dividend payout with AT&T and Verizon yielding 5.5% and 4.6%, respectively. As such, focusing on the ETF of this sector with the largest allocation to these two stocks could be a good idea. This could be easily done by investing in VOX, which tracks the MSCI US Investable Market Telecommunication Services 25/50 Index (read: Best ETF Strategies for 2015).

Holding 32 stocks, the top two Dogs – AT&T and Verizon – occupy the top positions making up for 22% share each. This suggests that the return of the fund is highly dependent on these two firms. The product is the largest and low cost choice in the telecom space with AUM of $822.2 million and expense ratio of 0.12%. However, volume is pretty low under 48,000 shares. The ETF returned about 5% in 2014 and has an annual dividend yield of 2.65%.