Investors turned to non-cyclical, defensive sector exchange traded funds with high dividend yields during uncertain market conditions, but these sectors are starting to fall behind as riskier picks outperform in the bull rally and interest rates inch higher.
Telecom, utilities and consumer staples, the three sectors with the highest dividend yields, have been underperforming since the week ended May 3 when yields on the 10-year Treasury note started its 100 basis-point advance, Sam Stovall, Chief Equity Strategist for S&P Capital IQ, said in a research note.
Within the S&P 500 sectors, telecom services has a 4.8% dividend yield and declined 8.6%; utilities has a 4.1% dividend yield and dropped 8.2%; and consumer staples has a 2.8% dividend yield and fell 2.8%.
The Vanguard Telecommunication Services ETF (NYSEArca: VOX) is down 4.6% over the past month. VOX has a 3.0% 12-month yield.
The Consumer Staples Select Sector SPDR Fund (NYSEArca: XLP) is down 3.4% over the past month. XLP has a 2.66% 12-month yield. [Keeping up With the Consumer…With ETFs]
The SPDR Utilities Select Sector Fund (NYSEArca: XLU) is down 4.5% over the past month. XLU has a 3.77% 12-month yield.
The underperformance of defensive sectors also weighed on overall returns in broad dividend ETFs, especially in funds with a high allocation to utilities. [Biggest Low-Volatility ETF Trailing S&P 500 as Utilities Weigh]