Ten-year Treasury yields inched lower Friday, but that decline did little to dent the benchmark yield’s recent surge. 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.
In predictable fashion, those rising yields have pressured an array of beloved rate-sensitive asset classes, including the utilities sector, real estate investment trusts (REITs) and exchange traded funds heavy on those groups.
That is a departure from 2014 when the utilities sector was easily the best performer in the S&P 500. Although 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. [Investors Sticking With Utilities-Heavy Dividend ETFs as Sector Slides]
In 2014, S&P 500 companies issued a record $900 billion in total buybacks and dividends, compared to the previous record $846 billion in 2007, and second-place $787 billion in 2013, reports John Melloy for CNBC.
Investors can maintain exposure to the theme of rising shareholder rewards even as interest rates increase with a slew of ETFs. We take a look at some of those funds here, which, hint, hint, are lightly allocated to rate-sensitive sectors.
WisdomTree U.S. Dividend Growth Fund (NasdaqGM: DGRW)
Index Dividend Yield: 2.23%
Year-to-date performance: Up 2.7%
Comment: The WisdomTree U.S. Dividend Growth Fund is an ideal way for investors capture dividend growth in a rising rate environment for several reasons. First, the ETF does not hold rate-sensitive telecom and utilities stocks. Second, DGRW is heavily allocated to sectors that, on a historical basis, have been sturdy performers when rates rise.
That includes consumer discretionary and technology, a combined 39.7% of DGRW’s weight. Consumer discretionary is one of just two sectors (financial services is the other) expected to deliver double-digit dividend growth this year.
DGRW has added over $121 million of its $417.6 million in assets under management this year, signaling rapid growth, and the ETF pays its dividend on a monthly basis.
First Trust NASDAQ Technology Dividend Index Fund (NasdaqGS: TDIV)
12-month distribution rate: 2.94%
YTD performance: Up 3.1%
Comment: Speaking of technology dividend growth, TDIV is the dedicated ETF play on that theme. In 2014, the average dividend increase from Apple (NasdaqGS: AAPL), IBM (NYSE: IBM), Cisco (NasdaqGS: CSCO) and Qualcomm (NasdaqGS: QCOM) was 14%. Those stocks combine for over 29% of TDIV’s weight. Apple, Microsoft (NasdaqGS: MSFT), Google (NasdaqGS: GOOG) and Cisco Systems have a combined $345 billion in cash, though Google is not a member of TDIV because the company does not pay a dividend.
ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL)
30-Day SEC Yield: 1.9%
YTD performance: 1.6%
Comment: NOBL features a combined weight of 36.7% to the industrial, materials, financial services and energy sectors, each of which outperformed the S&P 500 during the Fed’s last tightening cycle from 2004 to 2006.
The ETF ensures exposure to dividend growth by only including companies that have increased their dividends for at least 25 consecutive years. As of Feb. 19, telecom and utilities stocks combined for less than 4% of NOBL’s weight.
Schwab US Dividend Equity ETF (NYSEArca: SCHD)
Trailing 12-month yields: 2.71%
YTD performance: Up 1.8%
Comment: SCHD is the cheapest dividend-focused ETF on the market with an expense ratio of just 0.07%. The ETF also implements a quality tilt, targeting large companies that have paid out dividends in each of the past 10 consecutive years. Additionally, SCHD’s holdings are also selected based on fundamental factors like cash flow and debt, return on equity, dividend growth and dividend yield. [A Dividend ETF With a Quality Bias]
Vanguard High Dividend Yield ETF (NYSEArca: VYM)
Trailing 12-month yield: 2.86%
YTD performance: Up 1.8%
Comment: VYM advertises itself as a high-yield ETF, but it’s utilities weight is just 8.5%. Six other sectors command larger allocations in the fund. Additionally, VYM is a credible rising rates defense play with an 18.2% weight to tech stocks, including Apple as its largest holding, and a combined 22% allocation to energy and industrial names. [A Simple, but Effective Dividend ETF]
WisdomTree U.S. SmallCap Dividend Growth Fund (NasdaqGM: DGRS)
Index Dividend Yield: 2.72%
YTD performance: Up 1.2%.
Comment: DGRS tracks the WisdomTree U.S. SmallCap Dividend Growth Index, which is weighed by fundamental factors such as growth expectations, return on equity and return on assets, according to WisdomTree.
As a small-cap ETF, DGRS sports scant telecom and utilities exposure (just 2.7%) with more advantageous rising rates fare from the consumer discretionary and industrial sectors combine for 42.6% of the fund’s weight. DGRS also pays a monthly dividend.
FlexShares Quality Dividend Dynamic Index Fund (NYSEArca: QDYN)
Trailing 12-month yield: 2.41%
YTD performance: Up 1.7%
Comment: QDYN’s holdings “are selected based on expected dividend payment and fundamental factors such as profitability, solid management, and reliable cash flow,” according to FlexShares.
The ETF has the right recipe for thriving as interest rates climb as its consumer staples, telecom and utilities weights are modest. Conversely, the tech, energy and consumer discretionary all receive double-digit allocations.
QDYN has proven its worth in rising rate environments, surging 33.4% when Treasury yields soared in 2013, making it one of that year’s best-performing dividend ETFs.
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of Apple and Microsoft.