The Advisor’s Guide to Dividend ETFs in a Rising Rate & Inflationary Environment | ETF Trends

Investors are currently looking for investments that hedge against inflation, which has continued to swell and has reached four-decade highs, as well as remain resilient in a rising rate environment. 

Rising rates can have a disproportionate effect on certain market sectors. While growth stocks haven’t been consistently worse performers than value stocks during periods of rising rates, they’ve been hit particularly hard during the recent spike in interest rates due to their substantially higher valuations at the outset of recent market volatility.

Investors tend to rotate away from growth ETFs and stocks in favor of high dividend-yielding investments, moving into sectors such as financials and energy, in order to generate income that will help hedge against inflation.

A dividend ETF offers income and capital appreciation, in addition to generally being viewed as safer than other investments.

The companies paying dividends are often mature firms — though some can be quite small — that have mastered their business, made the essential investments, and now generate more money than they have a meaningful use for, giving investors a sense of confidence in their ability to be resilient amid an inflationary and rising rate period.

Looking at the nine-year record for all global equity income and global large-cap core ETFs and open-end funds, sorted by the nine-year Sharpe ratio, the SmartETFs Dividend Builder ETF (DIVS), managed by Guinness Atkinson Asset Management, sits at the top of the pack.

The only fund with a higher Sharpe ratio over a nine-year period, as of the end of January, is the Morgan Stanley Global Franchise Portfolio (MSFAX), a mutual fund. However, where DIVS beats MSFAX is in consistent return over a five-year period.

When considering ETFs exclusively, DIVS is the winner by the nine-year Sharpe ratio, as of the end of January, trailed by the BlackRock iShares Global 100 ETF (IOO), the BlackRock iShares MSCI Kokusai ETF (TOK), and the BlackRock iShares MSCI World ETF (URTH).

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