As 10-year Treasury yields have jumped this year, an array of rate-sensitive asset classes and sectors, many of which are income investor favorites, have languished. After years of chasing high-yield stocks, investors are finally pulling out of real estate investment trusts and utilities exchange traded funds ahead of a potential Federal Reserve interest rate hike.
This is true of dividend exchange traded funds, particularly those with large overweight positions in utilities stocks, this year’s worst-performing sector. To be sure, a 14.1% utilities weight has been problematic for the WisdomTree Dividend ex-Financials Fund (NYSEArca: DTN), but DTN’s 2.5% year-to-date loss is better than the 3.7% shed by the iShares Select Dividend ETF (NYSEArca: DVY). DVY’s utilities weight is more than double that of DTN’s. [Some Dividend ETFs Could Face Headwinds]
Add to that, DTN, as its name implies, excludes financial services stocks, the very names expected to get a lift from rising interest rates. Those factors do not mean the $1.1 billion DTN is bereft of opportunity for dividend investors. Actually, the opposite might be true.
DTN “was able to outperform the majority of active managers in its peer group over all periods displayed below. We find it impressive that it was able to outperform more than 99% of its peer group over the five-year period,” according to a recent WisdomTree research note.
The WisdomTree Dividend ex-Financials Index, DTN’s underlying index, had a dividend yield of 3.6% as of June 26. 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. DTN has not been hindered by excluding bank stocks. Since the March 2009 market bottom, DTN has more than quadrupled, easily thumping the performances of the four largest dividend ETFs over the comparable period. [Some Strategic Beta ETFs Shine Bright]
While the ETF shuns bank stocks and is heavy on utilities, investors should not interpret DTN as lacking rising rates protection. For example, the ETF devotes a combined 34.5% of its weight to consumer discretionary, technology and industrial names. Those are three of the top-performing sectors in rising rates environments.
“DTN seeks to provide broad exposure to the highest-yielding companies outside of the financial sector, while maintaining sensitivity to valuation. To help achieve this, the underlying Index that the Fund tracks, WTDXF, weights companies by their indicated dividend yield, rather than their market cap, and rebalances back to dividend yields on an annual basis,” according to WisdomTree.
Investors are trimming exposure to high-dividend stocks as the Fed signaled it is looking at its first interest rate hike in nine years. The higher rates would bolster payouts on more stable fixed-income assets and make these dividend stocks less attractive, especially after the multi-year run. [Bond Proxy ETFs Show Some Investors Believe Rates Will Rise]
Still, DTN could prove to be the exception when compared to high-yield ETF rivals.
“By following a rules-based Index that screens and weights companies by dividend yields, DTN can potentially raise a portfolio’s dividend yield and provide increased income to investors. DTN achieves this by tending to over-weight higher dividend-yielding stocks and under-weight the lower dividend-yielding stocks,” said WisdomTree.
WisdomTree Dividend ex-Financials Fund
Tom Lydon’s clients own shares of DVY.