Ten-year Treasury yields are rising once again. With Thursday’s close at 2.86%, 10-year yields are again flirting with the supposedly ominous 3% level after climbing 7.5% in the past month and 3.6% in the last five trading sessions.
As was seen earlier this year when rates spiked following the initial taper tantrum, some dividend exchange traded funds are vulnerable to rising rates. Namely those with heavy exposure to rate-sensitive sectors such as consumer staples, telecom and utilities. [Dividend Reinvestment Via ETFs]
Investors are showing their concern about the potentially dour impact higher Treasury yields could have on some dividend ETFs. Since the start of November, nearly $960 million combined has been pulled from the iShares Select Dividend ETF (NYSEArca: DVY), iShares Select Dividend ETF (NYSEArca: HDV) and the Vanguard High Dividend Yield ETF (NYSEArca: VYM).
VYM’s combined allocation to the three aforementioned sectors is about 29%. HDV’s is nearly 51%, but rising rates are not hampering all dividend ETFs. In fact, the scenario could shine a light on the future of dividend ETF investing.
“This year we saw a tremendous rise in the 10-year Treasury note yield, which moved from a low of 1.6% to its current level of 2.5%. During that same time frame, the WisdomTree U.S. Dividend Growth ETF (NasdaqGS: DGRW), a broadly diversified basket of dividend growth stocks, has maintained its yield of 2.00%. If an investor can reasonably say that a basket of stocks will aggressively grow their dividends year-over-year for the next 10 years, the chances of maintaining purchasing power due to inflation are greatly enhanced,” writes John Jacobs for Forbes.
Not only has DGRW outperformed the other dividend ETFs mentioned here since Nov. 1, the fund has brought in $8 million. DGRW’s yield may not sound like much, but the new ETF (May debut), offers advantages in a rising rate environment.
Notably, almost 61% of the fund’s weight is allocated the technology, industrial and consumer discretionary sectors, three of the best-performing sectors when rates rise. Additionally, technology and discretionary have been among the leaders in U.S. dividend growth over the past several years. [Nine New Dividend ETFs With Staying Power]
Speaking of tech dividends, the First Trust NASDAQ Technology Dividend Index Fund (NasdaqGS: TDIV) has also traded slightly higher and seen some inflows since the start of November.
“With the majority of TDIV’s allocations outside interest-rate-sensitive equity themes, its constituents aren’t as dependent on debt issuance as other income sectors. Investors may ultimately be better positioned to endure a rise in long-term interest rates, without borrowing costs eating into profitability,” writes Jacobs.
Microsoft (NasdaqGM: MSFT) and Apple (NasdaqGM: AAPL) combine for 17% of TDIV’s weight. Another dividend fund that has risen in both price and assets since Nov. 1 is the Cambria Shareholder Yield ETF (NYSEArca: SYLD).
SYLD represents a new twist on dividend ETFs because the fund does not focus solely on payouts. While constituent companies must pay cash dividends, they must also be repurchasers of their own shares and show evidence of trimming their debt. The methodology is working as SYLD is up almost 14% in the past six months. [Faber Discusses New Shareholder Yield ETF]
Cambria Shareholder Yield ETF
