2 Dividend ETFs to Fight Volatility With
Thanks to the growth of the ETF industry, investors now have a growing list of options to survive volatile markets. In fact, some products such as popular low volatility ETFs have helped investors thrive in rocky market settings.
The same goes for dividend ETFs, another growing sub-sector of the ETF universe. Global equity markets have been exceptionally volatile for at least the past six years and are expected to remain that way for the foreseeable future as Europe continues to grapple with its sovereign debt crisis.
Investors can cope with increased volatility with dividend stocks and ETFs, according to ETF issuer WisdomTree, one of the largest purveyors of dividend ETFs. In a research note penned by Jeremy Schwartz, the firm's research director, WisdomTree highlights the WisdomTree Equity Income Fund (NYSE: DHS) and the WisdomTree Dividend ex-Financials (NYSE: DTN).
DHS has already drawn acclaim for its status as a dividend fund and its recently bullish ways. With a dividend yield of 3.76 percent, DHS has gained 6.3 percent in the past 90 days.
WisdomTree notes that DHS and DTN 99 percent of their peer groups for the three years ending June 30, 2012. On one-, three-, five-year and since inception metrics, DTN has topped 90 percent of its large-cap value peers, according to WisdomTree. DTN has jumped almost seven percent in the past three months and currently yields close to three percent.
Importantly, WisdomTree recently shifted the dividend schedules for DHS and DTN from quarterly to monthly, adding the funds to the list of ETFs that can line income investors' pockets 12 times a year.
The post-inception returns for DHS have not been as stellar because of the fund's allocation to financial services stocks. Following the hard lessons taught by the global financial crisis, WisdomTree said it recently implemented a 25 percent sector and country cap across its index family. Since inception, DHS has had an average weight of nearly 31 percent to financials, but the ETF's exposure to the sector currently rests at just 12.2 percent.
Bolstering the case for owning DTN, which excludes financials, is that the "contribution of financials to the U.S. dividend stream is still about 50 percent lower than it was prior to crisis in 2007," WisdomTree said.
Technology, the sector with the best dividend growth since the crisis, accounts for 10.1 percent of DTN's weight.
DHS and DTN have also proven adept at tempering volatility for investors. DHS has beta of just 0.54 over the past 12 months and 0.72 over the past three years, far lower than what is found on the Russell 1000 Value Index, WisdomTree notes. The fund also sports favorable standard deviation numbers of 11.12 percent and 13.31 percent over the past year and three years, respectively.
Standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility, according to Investopedia.
"As uncertainty in the global equity market persists in the second half of 2012, focusing on dividends as a means of potential risk mitigation could continue to prove important as investors evaluate their equity exposures," Schwartz wrote in the note. "Both DHS and DTN track indexes encompassing this ‘attention to dividends' and have performed strongly over the past 1- and 3-year periods."
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