U.S. stocks have been in an uptrend since mid-November with small-cap ETFs pushing to all-time highs and the S&P 500 poised to do the same. However, the recent action in dividend ETFs suggests investors are on guard for weakness despite the recent rally.
For example, technical analyst Andrew Thrasher points out that the S&P 500 hasn’t been meaningfully outperforming SPDR S&P Dividend ETF (NYSEArca: SDY) during the move higher in U.S. equities.
SDY’s tracking index is designed to measure the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have consistently increased dividends every year for at least 20 straight years.
“We can use this lower-beta ETF in relation to the larger S&P 500 SPDR (NYSEArca: SPY) to get a feel for investor sentiment based on which security is outperforming the other,” Thrasher wrote at his blog.
“When traders are looking to maintain equity allocations but want to take some risk off the table they will often look to the more defensive sectors and higher dividend paying stocks to accomplish this. These types of shifts often cause SDY to outperform SPY during periods of ‘risk off’ trading,” he added.
Relative to the S&P 500, the dividend ETF overweights defensive sectors. SDY has 20.7% in consumer staples versus 10.6% for SPY. Meanwhile, the S&P 500 ETF’s biggest sector is information technology at 18.9% while it’s the smallest sector in the dividend fund at 2.3%.
“While the S&P 500 is currently testing its September highs, SPY has been unable to outperform its dividend-counterpart to get the ratio also back to its September level,” Thrasher notes.
“What this shows us is that while the large cap equity index has been in an uptrend off the recent low in November, there doesn’t appear to have been a shift in relative performance between the dividend ETF and the S&P 500,” he said. “It seems that traders have been staying cautious during this advance in equities, preferring to stick to the dividend space, causing the ratio between SDY and SPY to be essentially flat over the past several weeks.”