With Cyclicals and Value Back, 'SDOG' Is Almost Drooling in Anticipation

Cyclical value stocks are coming back into style as rising Treasury yields plague growth fare. Investors can get in on the action with dividend compensation through the ALPS Sector Dividend Dogs ETF (SDOG).

SDOG tries to reflect the performance of the S-Network Sector Dividend Dogs Index, which applies the “Dogs of the Dow Theory” on a sector-by-sector basis using the S&P 500 with a focus on high dividend exposure. SDOG’s equal-weight methodology is important because it reduces sector-level risk and dependence of some groups that are considered to be imperiled value ideas.

“Economically sensitive sectors and stocks have the most potential to surprise to the upside, easily beating dismal prior year earnings. This is reflected in the earnings momentum chart below, which gives energy, materials and financials an edge. Growth companies that excelled in 2020 will find it much harder to exceed prior-year levels,” according to BlackRock research.

That sentiment buoys the outlook for SDOG, which overweight some cyclical value groups relative to the S&P 500, while being underweight some growth sectors.

SDOG 1 Year Performance

SDOG’s Appeal

As investors look to more fiscal stimulus and increased vaccine distributions to support a broad economic recovery, cyclical fare is pushing higher.

“Many of the so-called stable sectors that did well in 2020 have poorer earnings momentum. Mega-cap technology stocks, long bastions of stability, also bore the brunt of the recent rates-related pain. Because these large tech stocks are long duration in their cash flow and growth prospects, they reap the greatest benefits from low rates and, in turn, have gotten hurt most as rates normalize upward,” adds BlackRock.

Dividends are in demand as fixed income investors face a lower-for-longer interest rate environment. The Federal Reserve is expected to maintain its near-zero interest rate policy to help push inflation up, bolster the economy, and lower the unemployment rate. The Fed has already stated it was willing to let inflation run higher to offset years inflation fell below its 2% target.

Other high dividend ETFs include the SPDR S&P Dividend ETF (SDY), iShares Select Dividend ETF (NYSEArca: DVY), and iShares Core High Dividend ETF (HDV).

For more on cornerstone strategies, visit our ETF Building Blocks Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.