One last point of differentiation is FDRR’s ability to invest up to 10% of the portfolio in international developed securities. As of today, FDRR has an approximate 5-6% position outside of the US, and this exposure is not concentrated in one country nor specific sector.
A question that could arise is how these factors (both the rate correlation and sector neutrality) affect FDRR’s ability to pay out. The following is a comparison of the dividend yield on the underlying constituents of these same dividend names (note: using the dividend yield on the underlying versus the ETF itself since FDRR has not paid a dividend yet):
Another question that may arise is “Does the rate protection actually work?” While Fidelity has data available to speak to this, the issue is the market has not seen a meaningful period of rising 10-year yields since the late 1980’s.
While there have been pockets of rate spikes here and there, the most sustained period of rising rates has been from May 2003 to June 2007, in which the 10 year slowly climbed about 160bps from 3.4% to 5%. Since the underlying index for FDRR started in the midst of this move (end of 2005), there is not really a great sustained rising rate period to measure FDRR’s effectiveness. While the relative performance during the short spikes may give a glimpse into the differentials, for now the market may have to believe in the theory and rationale versus seeing the raw data in action.
Past performance is no guarantee of future results. Investments are subject to risk and any investment strategy may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions. The Russell 1000 Index is a stock market index that represents the highest-ranking 1,000 stocks in the Russell 3000 Index, which represents about 90% of the total market capitalization of that index. One cannot invest directly in indexes, which are unmanaged and do not incur fees or charges. Stadion owns long positions in the iShares Core High Dividend ETF (HDV). Founded in 1993, Stadion Money Management is a privately owned money management firm based near Athens, Georgia. Via its unique approach and suite of nontraditional strategies with a defensive bias, Stadion seeks to help investors—through advisors or retirement plans—protect and grow their “serious money.” Contact Stadion at 800-222-7636 or . SMM-102016-754