Rising Rates Will Challenge This Dividend ETF

Thanks to the jump in Treasury yields, a rise that has been fueled by speculation the Federal Reserve will soon raise interest rates, some noteworthy dividend exchange traded funds could face intense scrutiny. Count the First Trust Value Line Dividend Index Fund (NYSEArca: FVD) among that group.

Once the Federal Reserve hikes interest rates, U.S. dividend stocks and exchange traded funds could experience a meaningful correction after investors piled into the yield-paying assets during the low rate environment. That is particularly true of dividend ETFs with big weights to rate-sensitive utilities and real estate stocks. [Red Flags for Dividend ETFs]

FVD allocates nearly 24% of its weight to the utilities sector, making that the ETF’s largest sector weight. More than any other sector, utilities are negatively correlated to rising interest rates.

FVD follows the Value Line Dividend Index, which equally weights components and utilizes the proprietary Value Line research to select components. Specifically, stocks are ranked by the Value Line Safety Ranking of 1 or 2 out of 5, which are based on price stability and financial strength. Additionally, the index excludes stocks with a dividend yield lower than the S&P 500.

“Overall I like the portfolio that has been created, but the weighting methodology creates the possibility of material changes in the allocation from period to period. There are several companies that were selected by the ETF’s methodology that also meet my definitions for attractive dividend payers, but I’d really like to see the strategy implemented with a lower expense ratio even if that required sacrifices such as less frequent rebalancing of the portfolio,” according to a Seeking Alpha analysis of FVD.