The ALPS Sector Dividend Dogs ETF (SDOG) is fashioned as a dividend exchange traded fund. These days, that’s already a positive for investors, but SDOG offers other favorable traits.
SDOG is a high dividend strategy to be sure, but it sports deep cyclical value characteristics, making its sector attribution relevant to investors. However, many investors don’t realize how important sector allocations are in value funds, nor do they realize that there are differences between cyclical and defensive sectors.
“Cyclical Energy and Financials sectors have outstripped the market and further outpaced defensive Healthcare, Consumer Staples and Utilities sectors to date in 2021,” according to IHS Markit. “During the recent expansion in corporations’ stock buyback programs since early 2020, the steadier pace of share repurchases by cyclical value sectors has provided a tailwind heading into 2021.”
With a 9.5% weight to energy stocks, which exceeds the allocations to that sector found in broad market and traditional value funds, SDOG is delivering above-average participation in one of this year’s best-performing sectors. In fact, SDOG’s above market weight exposure to energy has recently been useful because that group is topping other value sectors.
“Looking at performance for 2021 through, we find that Energy stocks far outpaced the remaining value sectors, with a cumulative return of 49%. This compares with the SPDR S&P 500 ETF return of 23%. Financials were also highly favored, exceeding both the remaining sectors and the benchmark with a 30% cumulative return,” adds IHS Markit.
SDOG allocates 7.59% of its weight to financial services stocks. That’s not a massive exposure, but it’s enough to provide some positive correlation to rising interest rates ahead of 2022 when the Federal Reserve is expected to raise interest rates multiple times.
IHS Markit also notes that in 2021, a tailwind for energy and financials, both cyclical sectors, has been steadiness in buybacks. As in, shares outstanding counts are dwindling, providing support for per share earnings in those sectors.
“In summary, on closer inspection of value stocks in anticipation of an increasing rate environment, we find differences in investors’ preferences for cyclical versus defensive value stocks. Since 2020, in a prolonged period of extremely easy financial conditions, stock buyback programs have proliferated, with a steadier pace of share repurchases associated with cyclical value sectors,” concludes the research firm.
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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.