While it’s still too early to see if the one-day sell-off will continue to the end of 2012 and beginning of 2013, thereby reversing the strong intra-year performance, we believe some investors may want to consider dividend ex-financials strategies as a way to hedge the risk of this type of sell-off in financials. [New Dividend ETF Targets China Minus the Banks]
Along with Luciano Siracusano, our Chief Investment Strategist, and Christopher Gannatti, a Research Analyst, I published a post-election commentary that discussed why we believe the prospects for higher dividend taxes is unlikely, in our view, to dramatically reduce the demand for dividend-paying stocks. Our research showed that the market environment had a much greater potential to impact returns over various tax rate climates than did the tax environment. There are also many tax-insensitive investors who we think have the potential to take advantage of those who are selling dividend-paying stocks held in taxable accounts for fear of potentially higher taxes on dividends.
DTN, our Dividend ex-Financials Fund, is one strategy that can hedge against the type of sell-off we saw in financials on November 7, 2012, the day following the election. The Fund tracks an Index that takes a diversified approach to U.S. equities with relatively high dividend yields1 in the nine sectors outside of Financials—and we have done prior research emphasizing that stocks in relatively higher-yielding equity sectors2(S&P 500 Consumer Staples Index, S&P 500 Health Care Index and S&P 500 Telecommunication Services Index) are not as expensive as many might think (click here for full research). We believe DTN offers a means to generate continued exposure to dividend-paying U.S. equities while avoiding the financial sector—all the more important as a potential source of income when interest rates remain at historic lows3.
1The WisdomTree Dividend ex-Financials Index selects a maximum of 10 stocks with the highest indicated dividend yields from each of the nine sectors outside of Financials as of the date of index screening, 11/30 of each year. Indicated dividend yields tax the company’s indicated annual dividends divided by the share price.
2These are three heavily weighted sectors within the WisdomTree Equity Income Index, which focuses on selecting the 30% of stocks from within the WisdomTree Dividend Index with the highest indicated dividend yields.
3Refers to the current policy of the U.S. Federal Reserve and chairman Ben Bernanke, who has stated that interest rates will remain exceptionally low until 2015.
Christopher Gannatti is a registered representative of ALPS Distributors, Inc.
Jeremy Schwartz is director of research at WisdomTree Investments (NasdaqGM: WETF). This post was republished with permission from the WisdomTree blog.