Dividend ETFs: The ‘Bondification’ of the Stock Market

August 5th at 3:24pm by John Spence

WisdomTree Emerging Markets Dividend Growth Fund (NasdaqGS: DGRE) is the latest ETF to join the growing ranks of dividend-themed funds, and the category is showing no signs of slowing down as bond yields remain historically low even after the recent rise.

“Many income-starved investors have turned to dividend stocks as bond alternatives. Exchange traded products focused on dividends have rushed to meet this demand,” according to a recent note from BlackRock. The firm manages the $13 billion iShares Select Dividend (NYSEArca: DVY), one of the largest ETFs in the group.

Some other highlights from the report:

  • Dividend ETPs have gathered $87 billion in assets, accounting for 5.7% of total global equity ETP assets.
  • The number of dividend ETPs has grown 75% since 2010, outpacing growth in fixed income ETPs and the total ETP market.
  • Dividend ETP flows closely track ETP specializing in investment grade bonds—and tend to move inversely with flows into cyclical stocks.
  • Funds vary greatly in industry sector exposure and yield because of differences in methodologies and selection criteria.
  • U.S. stocks dominate the holdings of the top 14 divided ETPs with an 82% share.
  • The top 25 stocks held by dividend ETPs make up 30% of total assets.
  • Stock concentration within industry sectors is relatively high, with the top five stocks making up 65% of energy holdings of dividend ETPs.

“Record low yields have led to the bondification of the equity market. Investors are buying quality companies with predictable earnings and dividend income,” according to BlackRock.

However, dividend ETF inflows have slowed recently, coinciding with rising interest rates. [WisdomTree Adds Dividend ETF]

“Money flows into dividend ETPs tend to move inversely with those into ETPs specializing in cyclical sectors such as materials, energy and financials,” the ETF manager added. “Dividend stocks are regarded as defensives, and typically outperform cyclicals in periods of sluggish economic growth.”

Indeed, investors have been buying cyclical sector ETFs recently on speculation the economy will gain momentum. If cyclical sectors outperform, it would be a headwind for dividend ETFs. [Sector ETFs for Rising Rates and an Improving Economy]

Full disclosure: Tom Lydon’s clients own DVY.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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