ETF Trends
ETF Trends

The Federal Reserve is doing scores of dividend stocks, exchange traded funds and other income-generating asset classes a good turn this year by delaying another interest rate increase. Providing an added boost to dividend ETFs is the utilities sector, which for most of this year, has been a stalwart performer.

Dividend ETFs with big allocations to the utilities sector are, of course, benefiting. Consider the First Trust Morningstar Dividend Leaders Index Fund (NYSEArca: FDL), which as a 19.3% weight to utilities stocks, the ETF’s second-largest sector weight.

FDL tracks the Morningstar Dividend Leaders Index. That index “captures the performance of 100 highest yielding stocks that have a consistent record of dividend payment and have the ability to sustain their dividend payments,” according to Morningstar.

Utilities sector fundamentals remain strong. However, utilities have been underforming 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.

Most investors view utilities as a reliable, income-generating asset that exhibit some bond-like characteristics. As interest rates declined, the sector appealed to many income investors for its relatively higher yields.

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Beyond its hefty utilities weight, FDL is well-positioned on other fronts to benefit from declining Treasury yields. For example, the ETF devotes 21% of its weight to consumer staples names and another 16.6% to telecom stocks. Those are both rate-sensitive sectors. Additionally, FDL’s weight to telecom stocks is high compared to other dividend ETFs, helping drive the fund’s yield north of 3%.

FDL “specifically excludes REITs, which should be favorable for investors who want to hold the fund in a taxable account without worrying about the unqualified dividends coming from REITs. It also offers investors a benefit in assuring the shareholders that the fund won’t be duplicating any positions that decide to establish in REITs to generate additional yield for their portfolio,” according to a Seeking Alpha analysis of FDL.

Most investors view utilities as a reliable, income-generating asset that exhibit some bond-like characteristics. As interest rates declined, the sector appealed to many income investors for its relatively higher yields [Read more: Crunch Time for Rate-Sensitive ETFs].

Utilities traditionally trade at richer multiples relative to the broader market due to the sector’s defensive traits, but consumer staples are actually more expensive at the moment.

“Great dividend yield and I do like the strategy in place for investors that are seeking a strong dividend yield and willing to buy into the black box technique on the strength of the holdings that were selected the last time the allocations were handled,” adds Seeking Alpha.

Want more Dividends ETF news and analysis? Visit www.etftrends.com/Dividends

First Trust Morningstar Dividend Leaders Index Fund

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.