Financial services stocks and exchange traded funds, broadly speaking, notched impressive performances last year and more of the same was expect in 2014 as many investors bet on higher interest rates.
That script has been flipped as 10-year Treasury yields have plunged 15%, hampering bank stocks and ETFs in the process. The Financial Select Sector SPDR (NYSEArca: XLF) and the Vanguard Financials ETF (NYSEArca: VFH) are up an average of 1.4% this year.
Although some bank stocks have delivered expected dividend increases this year, bolstering the sector’s reputation as post-financial crisis source of dividend growth, the exclusion of financials is not hindering the WisdomTree Dividend ex-Financials Fund (NYSEArca: DTN).
No, DTN does not offer investors any leverage to dividend increases from the likes of J.P. Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC). Then again, DTN also has not subjected investors to the disappointment of Citigroup (NYSE: C) not getting permission from the Federal Reserve to boost its payout. Nor was DTN vulnerable when Bank of America (NYSE: BAC) rescinded its dividend hike. [Bank ETFs Deal With Bad News From BofA]
Bank dividends have gradually improved since the financial crisis, with growth noticeably improving over the past two years, but DTN makes up for the lack of financials in other ways.
For example, the ETF’s largest sector allocation is utilities at 17.1%. The boring but high-yielding sector is the best performer in the S&P 500 this year. [Utilities Bounce Good for Dividend ETFs]
Utilities strength is just one reason DTN, home to $1.1 billion in assets under management is up 5.2% this year, a performance that is 70 basis points better than the Vanguard High Dividend Yield ETF (NYSEArca: VYM) and two and a half times better than the Vanguard Dividend Appreciation (NYSEArca: VIG). DTN has outperformed VYM by 550 basis points since the latter debuted in November 2006.
The WisdomTree Dividend ex-Financials Index, DTN’s underlying index, had a dividend yield of 3.43% as of May 22, according to WisdomTree data.VIG yields in the area of 2%.
Of note for dividend investors looking for a steady income stream, DTN pays a monthly dividend, as do all of WisdomTree’s U.S.-focused dividend ETFs.
Despite its heavy utilities allocation, DTN returned an admirable 27.6% last year as Treasury yields soared. That highlights an important point about DTN: The ETF is also well-allocated to sectors that perform well when in rising rate environments.
Technology, industrial and consumer discretionary names combine for 30% of DTN’s and those are, historically, the three best sectors when rates rise. On a related note, along with financials, technology and consumer discretionary are the largest contributors to S&P 500 dividend growth over the past several years. [Beat Inflation With Dividend Growth ETFs]
Importantly, skimping on financials has not meant skimping on returns for DTN investors with longer-term holding periods. Since the March 9, 2009 market bottom, DTN is up 295.4%, including paid dividends. That performance easily tops those offered by the four largest U.S. dividend ETFs, a group that includes VYM and VIG, the latter of which is up “just” 180.8% over that time.
Since inception in May 2009, the WisdomTree Dividend ex-Financials Index has a beta against the S&P 500 of 0.8 and annualized volatility of 11.57%, according to WisdomTree data.
WisdomTree Dividend ex-Financials Fund
