It is safe to say the lights were turned off on the utilities trade last month. The classic characteristics of the utilities sector such as steady dividends, low-volatility and performance in down markets worked against the sector last month as the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilties ETF by assets, careened to an 8.1% loss.
That tumble was part cyclical rotation with investors fleeing conservative sectors in favor of higher beta fare. It was also part rising interest rates. In past high rate environments, some utilities have shown a penchant for cutting dividends because the escalated borrowing costs crimp what is a capital-intensive business model. [Interest Rates Dim Utility Sector ETFs]
The utilities sector’s struggles does not mean the dividend trade is dead. ETF investors looking to generate income while skimping on utilities or dodging the sector outright have plenty of compelling options. Consider the following ETFs.
WisdomTree LargeCap Dividend Fund (NYSEArca: DLN)
The WisdomTree LargeCap Dividend Fund is not bereft of utilities stocks, but the sector is merely the ninth-largest in the ETF at a weight of 5.6%. Conservative investors will enjoy the fact that DLN’s largest sector weight is a 15.5% allocation to consumer staples.
Importantly, DLN not only offers exposure to companies that have lengthy histories of increasing their payouts, but also to sectors that are expected to be major sources of dividend growth in the future. Tha means financials and technology, which combine for almost 28% of the ETF’s weight. Technology, DLN’s second-largest sector weight, is the largest dividend-paying sector in the U.S.
As banks have moved to restore their dividends in a post-financial crisis worlds and technology firms have acquiesced to pressure to boost shareholder rewards, DLN has gained 70% over the past three years and the ETF pays a monthly dividend. [How To Reduce Risk With Dividend ETFs]
FlexShares Quality Dividend Dynamic Index Fund (NYSEArca: QDYN)
The FlexShares Quality Dividend Dynamic Index Fund is one of the newer entrants to the dividend ETF arena, but with the cyclical rotation gaining steam, QDYN’s time to shine may have arrived. QDYN, which debuted in December, tries to reflect the performance of the Northern Trust Quality Dividend Dynamic Index, which has a targeted overall beta that is between 1.0 to 1.5 times that of the parent index. [FlexShares Adds New Dividend ETFs]
Staples and utilities names combine for over 13% of QDYN’s weight and while that may seem like a high number, consider that all four of the ETF’s top sector weights are valid cyclical rotation plays. That group is comprised of financials, technology, energy and consumer discretionary.
As is the case with DLN, QDYN offers plenty of exposure to the financials and technology dividend growth themes as those are the ETF’s two largest sectors and combine for over 36% of the fund’s weight. The fund has a weighted averaged dividend yield of 3.34% and a weighted average beta of 1.22, according to FlexShares data.
FlexShares Quality Dividend Dynamic Index Fund
ETF Trends editorial team contributed to this piece.