Meanwhile, some dividend ETFs, such as SPDR S&P Dividend (SDY 89 Overweight), experienced net outflows year to date despite offering exposure to companies with long-term records of dividend increases. In September 2016, Fidelity Dividend for Rising Rates (FDRR) launched with a twist on the traditional dividend-growth theme. The proprietary index behind FDRR holds companies that are expected to continue to pay and grow their dividends and have a positive correlation of returns to increasing Treasury yields.
Kraft Heinz (KHC) and Wal-Mart (WMT) are among the ETF’s largest consumer staples (9%) holdings and have low CFRA qualitative risk assessments. CFRA equity analyst Joseph Agnese has a buy recommendation on KHC. He thinks the company’s leading market share positions, strong cash flow generation and significant EBITDA margin expansion opportunities positions it well to achieve strong EPS growth over the next three-years.
Despite also launching less than three years ago and with only $94 million in assets, CFRA ranks FDRR as Overweight. Our ranking is helped by favorable CFRA STARS and overall modest risk consideration attributes.
FDRR is up 6.3% year to date, ahead of the 4.5% and 3.5% respective gains for SDY and Fidelity Core Dividend (FDVV 27 Overweight); FDVV focuses on dividend-growth companies but does not incorporate sensitivity to bond yields.
With the Federal Reserve raising rates last week and indicating that gradual rate hikes are to be expected throughout the year, CFRA thinks investors should broaden the range of smart-beta products they consider. While established offerings SDY, SPLV and USMV remain worthy of attention, we contend FDRR and XRLV are next-generation products with some strong attributes.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.