Investors Sticking With Utilities-Heavy Dividend ETFs as Sector Slides

One year’s leading sectors can turn into the following years laggards and that much is happening in 2015 with utilities stocks.

With a 2014 gain of nearly 29%, the Utilities Select Sector SPDR (NYSEArca: XLU) was the top performer among the nine sector SPDR exchange traded funds. The trend of utilities sector leadership is taking a breather in 2015 as XLU is by far the worst performer of the nine SPDRs to this point in the year. Year-to-date, XLU is down 4.4%, making it one just two sector SPDRs to trade lower on the year. The Financial Select Sector SPDR (NYSEArca: XLF) is the other. [Utilities ETFs Look Expensive]

Adding to the vulnerability of utilities stocks and ETFs is the sharp turn higher by 10-year Treasury yields. Entering Wednesday, 10-year yields had surged 28% in the past 10 days, the second-biggest 10-day rally for those yields over the past 45 years.

Rising Treasury yields and slumping utilities stocks have not been enough to sour investors on some of last year’s top-performing dividend ETFs, which, not surprisingly, feature substantial allocations to the utilities sector.

Despite aggressive valuations for the utilities and consumer staples sectors, investors have added over $103 million in new money to the iShares Select Dividend ETF (NYSEArca: DVY) thisyear. DVY was a stout performer in 2014, returning nearly 15%. However, the $15.7 billion ETF with a trailing 12-month yield of 3.05% has been lethargic this year.

DVY entered Wednesday with a 0.4% year-to-date, a sign the ETF’s 34.5% weight to the utilities sector is weighing on the fund. The ETF remains alluring for income ETFs, in part due to a screening methodology that includes dividend growth and payout ratios. However, stock selection by yield could make DVY vulnerable to increased lethargy if Treasury yields continue higher. [An Old Dividend ETF Friend]

Other dividend ETFs with big utilities weights have also lagged rival dividend ETFs with less utilities exposure. For example, the First Trust Morningstar Dividend Leaders Index Fund (NYSEArca: FDL) and the First Trust Value Line Dividend Index Fund (NYSEArca: FVD) are up an average of 1.8% this year. FVD’s utilities weight is 22.8% while FDL allocates 21.9% to the sector. Investors have added almost $91 million combined to FDL and FVD this year. [Utilities-Heavy Dividend ETFs]

Dividend ETFs with scant utilities exposure have been superior performers to this point in 2015. For example, the ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL) has offered nearly double the returns of FVD and tripled the returns of DVY this year.

In January, we said of the ETF “With NOBL’s scant utilities sector exposure (just 1.86% at the end of the third quarter), the ETF should continue acquiring new assets if interest rates rise this year. After coming to market in October 2013, NOBL has rapidly managed to top $500 million in assets under management. [Dividend ETF Draws Praise]