Exchange traded funds with an emphasis on dividends have become increasingly popular. But all dividend ETFs are not created equal and some sport higher expense ratios that can erode yields and total returns.
Although it appears as though the Federal Reserve will again pass on raising interest rates at its September meeting, interest rates will rise at some point in the U.S. and those higher borrowing costs could pressure from dividend ETFs. In other words, the Fidelity Dividend ETF for Rising Rates (NYSEArca: FDRR) could prove to be well-timed new dividend ETF.
The Fidelity Dividend ETF for Rising Rates debuted last week as part of Fidelity’s new suite of six smart beta ETFs. FDRR will track large- and mid-cap dividend-paying companies expected to continue to pay and grow dividends and have a positive correlation of returns to increasing 10-year U.S. Treasury yields. Underlying stocks can include those with historically high dividend yields, low dividend payout ratios, high dividend growth, and a positive correlation of returns to rising 10-year U.S. Treasury bond yields.
Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.