The June jobs report showed the addition of 195,000 new jobs, enough to spark a rally in U.S. stocks. That equity rally plagued bonds on speculation the Federal Reserve could begin tapering its quantitative easing program as soon as September, sending yields on 10-year U.S. Treasurys surging almost 8.6% to 2.71%.
Soaring Treasury yields are trimming the universe of dividend ETFs that yield more than government bonds down in a significant fashion. However, it pays to remember varying yields in dividend ETFs reflect the different methodologies baked into the funds’ tracking benchmarks. Investors should be comfortable with how a dividend ETF works before buying in. [Largest Dividend ETFs Yield Less Than Treasurys]
One ETF that breaks from the often-used methodology of focusing on dividend increase streaks could also prove useful for income investors in a rising rate environment. That ETF is the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF), which has a 30-day SEC yield of 2.74%, slightly above what investors will get on 10-year Treasurys. QDEF’s weighted average yield is a solid 3.33%.
QDEF is part of a three-ETF suite of dividend products introduced by FlexShares last December. That group included the FlexShares Quality Dividend Index Fund (NYSEArca: QDF) and like QDF, QDEF also offers investors exposure to the cyclical rotation theme. Additionally, QDEF, compared to some of the older dividend ETFs on the market today, is light on some of the sectors that could prove vulnerable should rates continue rising. Utilities and telecom names combine for less than 10% of QDEF’s weight. [A New Dividend ETF With The Right Sector Mix]
Although QDEF is not focused on dividend growth per se, the ETF is overweight financial services stocks, which have been a leading source of S&P 500 dividend growth in the past three years. The new ETF has a 17.9% weight to that sector compared to 16.7% for the S&P 500. Conservative investors will also find something to like with QDEF as the fund also overweights consumer staples with a 12.5% weight compared to 10.5% in the S&P 500.