So go Utilities, so Goes This Dividend ETF…Sort Of

When utilities stocks soared earlier this year, investors were reminded of some key points. First, the utilities sector, though not a shoe in to fall when interest rates rise, sure does enjoy more sanguine interest rate environments.

Second, utilities sector strength is often a boon for an array of dividend exchange traded funds that focus on high yield stocks, a focus that usually means those ETFs are overweight the utilities sector. A prime example of a dividend ETF that enjoyed the utilities rally earlier this year is the iShares Select Dividend ETF (NYSEArca: DVY). [Utilities Surge Helps Some Dividend ETFs]

Home to almost $13.9 billion in assets under management, DVY is the second-largest U.S. dividend ETF behind the Vanguard Dividend Appreciation ETF (NYSEArca: VIG). DVY is also big when it comes to utilities exposure.

Try 33.9% to that sector, more than double its allocations to the consumer goods and industrial sectors. To exceed DVY’s utilities exposure, the ETF’s weight to consumer goods, industrial and health care names must be combined. Four of DVY’s top-10 holdings are utilities stocks.

Given the large weight in utilities, the sector plays a major role in DVY’s performance at the present time. Also, DVY has consistently underperformed SPY since 2012. In general, dividend ETFs started underperforming the broader market in May 2013 when interest rates spiked, but DVY’s started trailing earlier due to utilities relative under performance weighing on returns,” notes Matthew Sauer in a post on Seeking Alpha.

Put simply, the utilities sector, the second-smallest sector weight in the S&P 500, is the largest determinant of DVY’s fortunes and data support that assertion.

Over the past three years, DVY’s correlation to the Utilities Select Sector SPDR (NYSEArca: XLU), the benchmark utilities ETF, is almost 0.76, according to State Street data. And the correlation between the two ETFs has been rising. That 0.76 three-year correlation between DVY and XLU is up from less than 0.72 over the past five years and less than 0.53 over the past decade.