Like many dividend exchange traded funds, the iShares Select Dividend ETF (NYSEArca: DVY) has struggled this year as investors have become increasingly concerned about the timing of a Federal Reserve interest rate hike.
DVY, one of the largest U.S. dividend ETFs, is down 5% year-to-date. The $13.2 billion DVY allocates over a third of its weight to rate-sensitive utilities stocks, indicating the fund’s 2015 slump is not surprising.
“DVY seeks to track a Dow Jones index that screens by dividend growth and payout ratios, with the stocks selected based on yield. DVY has a 0.39% expense ratio and earns favorable ranking inputs for its relatively high S&P Capital IQ Quality Rankings and relatively low S&P Capital IQ Qualitative Risk Assessments. However, a number of its largest holdings are considered overvalued by S&P Capital IQ,” said S&P Capital IQ in a research note earlier this year.
DVY remains alluring for income ETFs, in part due to a screening methodology that includes dividend growth and payout ratios. On the bright side, recent history shows dividend ETFs can whether the rising Treasury yields storm. That happened in 2013 when Treasury yields surged, but DVY turned in a solid annual performance despite those rising Treasury yields. [An Old Dividend ETF Friend]
Treasury yields rise and the utilities sector falls. With market participants pricing in an interest rate hike from the Federal Reserve, perhaps as soon as this month, the rising yields/slumping utilities sector scenario is playing out. [Crunch Time for Rate-Sensitive ETFs]
Barclays analysts believe utilities stocks have upside potential, even if the Fed proceeds with boosting rates this month and several times next year.
“The cycle, they say, most closely resembles that of 2004, and regulated utilities outperformed the broader market by 6% and 18% in the three and 12 months following the first hike that year,” according to Seeking Alpha. “As for this particular moment, Barclays says a flattening yield curve, increasing high-yield default rates, and a strong greenback impacting S&P earnings relative to utilities all bode well for the sector.”
“In conclusion, DVY is very unique dividend ETF. Since it gives a much different exposure to investors, I see it as an excellent complement to those who own other traditional dividend ETFs. Overall, the fund is a solid pick for any dividend investor seeking attractive distributions and relatively low volatility,” according to a Seeking Alpha analysis of DVY.
iShares Select Dividend ETF
Tom Lydon’s clients own shares of DVY.