ETF Trends
ETF Trends

Scores of new exchange traded funds have come to market this year. Among the new smart beta offerings is the Fidelity Core Dividend ETF (NYSEArca: FDVV), which debuted in September.

Stocks with steady dividend yields reassure investors of a company’s strong financial health.

Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return.

Over the past 40 years, companies that boost payouts have proven to be less volatile than their counterparts that cut, suspended or did not initiate or raise dividends.

FDVV follows the Fidelity Core Dividend Index, an index that focuses on delivering steady dividend growth via large- and mid-cap stocks. “The Fidelity Core Dividend Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends,” according to Fidelity.

The new ETF allocates more than half its weight to consumer discretionary, energy and financial services stocks, a sector lineup that could help FDVV in the face of higher interest rates. At 12.1%, technology is the other sector that commands a double-digit weight in FDVV.

“While dividend ETFs have been strong performers, there’s some concern that conditions are becoming less ideal for continued outperformance. The S&P 500’s P/E ratio is at levels not seen since the financial crisis. Consumer staples and utilities, two of the more traditionally conservative sectors, have seen valuations stretched to levels that haven’t been seen in years,” according to ETF Daily News.

Staples and utilities combine for less than 11% of FDVV’s weight with the former being the ETF’s smallest sector exposure.

FDVV could also be useful if inflation rises. 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, such as the rookie Fidelity ETF. 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.

“A three month lifespan isn’t enough to judge the possible long-term success of the Core Dividend ETF but initial signs are encouraging. The portfolio looks to be smartly constructed and its 4% yield is a differentiator if it can be maintained without pushing the boundaries on risk. It’s still too early to deem this fund a buy but it’s worth keeping an eye on,” adds ETF Daily News.

FDVV had nearly $20 million in assets under management as of Oct. 31, according to issuer data.

For more information on new fund products, visit our new ETFs category.