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.[related_stories]
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%.