Declining U.S. Treasury yields have been a boon for a wide array of income-generating asset classes and sectors this year, including dividend exchange traded funds. In particular, dividend ETFs with healthy allocations to rate-sensitive sectors are thriving.
That includes the iShares Select Dividend ETF (NYSEArca: DVY), one of the largest U.S. dividend ETFs. DVY is up nearly 7% year-to-date while the S&P 500 is a barely in the green. 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.
The current environment has been especially favorable for DVY because the ETF allocates over 32% of its weight to utilities stocks, this year’s best-performing sector. That gives DVY one of the highest weights to utilities names of any ETF that is not a dedicated utilities fund. It also feeds the ETF’s robust trailing 12-month dividend yield of almost 3.4%.
DVY “tracks the U.S. Select Dividend Index, which tracks companies that pay relatively high dividend yields on a consistent basis over time. The words “high dividend yields” may have piqued your interest, but remember that higher yields mean higher risk. While the top five holdings for DVY are stocks that are likely to be more resilient than the average stock found throughout the broader market,” according to Investopedia.
Utilities sector fundamentals remain strong. However, utilities have been underperforming due to the sector’s inverse relationship to rising interest rates – when rates rise or investors fear higher rates, utilities typically underpeform, and vice versa.