A Dividend ETF That Limits the Negative Effects of Rising Rates

Even in a rising interest rate environment, people will still seek out dividend stocks to generate yields. Exchange traded fund investors, though, can look to a targeted dividend strategy that specifically screens out areas vulnerable to rising rates.

For instance, the Fidelity Dividend ETF for Rising Rates (NYSEArca: FDRR) 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 and have a positive correlation of returns to increasing 10-year U.S. Treasury yields.

FDRR was designed to “reduce unintended exposure in sector bets,” Darby Nielson, managing director of research at Fidelity Management & Research Company, told ETF Trends in a call. “The ETF reduces exposure to utilities and REITs, sectors that really take it on the chin during rising rates.”

Looking at FDRR’s portfolio construction methodology, the underlying Fidelity Dividend Index for Rising Rates employs a multi-factor approach, including a 63% weight toward companies with higher dividend yields, and smaller 13.5% to avoid firms with payouts that are too high and might be cut in the future, 13.5% to those expected to grow dividends in the future and 10% to firms that perform better with rising rates.

FDRR’s main selling point is the ETF’s specific screens towards companies that perform well during rising interest rate environments.