It's Getting Pricey to Hedge a Big Dividend ETF

Investors’ thirst for defensive, high-yielding, low beta consumer staples and utilities stocks made the iShares Select Dividend ETF (NYSEArca: DVY) one of the better-performing dividend exchange traded funds through the first half of this year. However, options data suggest some traders are concerned that trade is currently vulnerable.

The current environment has been especially favorable for DVY because the ETF allocates nearly 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. On a trailing 12-month basis, DVY yields north of 3.1%.

Related: Low U.S. Interest Rates Boost International Dividend ETFs

DVY remains alluring for income investors, 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.

Although Fed funds futures indicate dwindling chances of the U.S. central bank raising interest rates when it meets later this month and perhaps just one rate hike before the end of this year, at the most, investors have recently been departing rate-sensitive consumer staples and utilities ETFs in a big way. That is contributing to elevated options prices on DVY.


“The six-month implied volatility spread between the iShares dividend ETF and the SPDR S&P 500 ETF sits just half a point from a more than four-year high reached in May, according to data compiled by Bloomberg,” reports Joseph Ciolli for Bloomberg.

DVY is one of the largest U.S. dividend ETFs and is heavily allocated to utilities and staples names.