This is the time of year when many exchange traded funds rebalance, adding new stocks while dumping others and raising and trimming sector exposures.
The WisdomTree Total Dividend Fund (NYSEArca: DTD) will be one of those ETFs. DTD, which is seven and a half years old and home to almost $387.1 million in assets under management, tracks the WisdomTree Dividend Index (WTDI).
WTDI “is dividend weighted at the annual reconstitution in December to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share,” according to WisdomTree.
Rather than focusing on dividend increase streaks, popular and effective methodology used for other dividend ETFs, “WisdomTree Indexes employ a rules-based rebalancing mechanism that adjusts relative weights based on underlying dividend trends,” according to a note published Monday by WisdomTree Research Director Jeremy Schwartz. [WisdomTree: Managing Valuation Risk]
Said differently, WTDI’s changes are intended to reflect strong dividend growth, which has the potential to benefit DTD going forward.
“The companies that saw their weight increase at the rebalance had a median dividend growth of 17.0%, which was greater than the median dividend growth of all companies (at 8.4%). Companies that saw their weight lowered at the rebalance had a median dividend growth of just 5.1%,” said Schwartz.
Technology saw the largest sector increase in WTDI of almost 1%, which is not surprising as the sector has been one of the leading dividend growers in the S&P 500 over the past several. However, because the notion of technology firms paying dividends is still a relatively new concept, dividend ETFs weighted by payout increase streaks are often light on the tech sector because the group has few names that have been boosting dividends for 10, 15 or 25 years. [Dividend ETFs to Fight Rising Rates]
Tech now accounts for 14.2% of DTD and the ETF’s weights to Apple (NasdaqGM: AAPL), International Business Machines (NYSE: IBM) and Oracle (NYSE: ORCL) have all been slightly increased. DTD’s health care exposure was trimmed a bit.
“The Industrial and Health Care sectors saw the largest reduction in weight within WTDI. Both sectors saw strong absolute returns over the period, which made it harder for their dividend growth to keep pace. The three examples above that saw a reduction in weight help illustrate this trend, with an average return of 62% over the period, but an average dividend growth below 8%,” said Schwartz.
Those two sectors combine for 20.3% of DTD’s weight. DTD has a distribution yield of 2.45%, annual fees of 0.28% and pays a monthly dividend. Here is how DTD has performed against the largest U.S. dividend ETF over the past three years.
Chart Courtesy: ETF Replay.
Tom Lydon’s clients own shares or Apple.