Dividend Growth ETF 'SMDV' Looks to Thrive as Rates Rise

Although interest rates continue rising, 2018 has been a banner year in terms of domestic dividend growth with some dividend-focused exchange traded funds delivering steady returns in the face of rate tightening by the Federal Reserve.

With small-cap stocks and ETFs performing well this year, investors may want to consider the potentially potent combination of dividend growth and smaller stocks. The ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV) helps with objective.

SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index, which includes small-cap firms with dividend increase streaks of at least a decade.

“Dividend payers often underperform in the early part of a rising rate cycle. But as the interest rate cycle matures, dividend payers in general, and dividend growers in particular tend to more than recoup that initial underperformance,” according to ClearBridge Investments.

SMDV ETF Advantages

A stronger U.S. dollar and concerns over weaker global growth are also driving investors toward smaller company stocks that tend to earn most of their money from a still growing domestic economy. Further supporting the small-cap outlook, the U.S. economy is still showing signs of growth with U.S. retail sales and consumer spending trends on the rise while the rest of the world is revealing weaker economic data.

While 21.42% of SMDV’s holdings are utilities stocks, the ETF offers some cyclical positioning via combined 27.51% weight to industrial and financial services stocks. Banks, including small-cap names, are benefiting from changes in U.S. tax policy.