Dividend ETFs For A No Tapering World
Dividend ETFs have not gone out of style at any point this year.
As a group, income-generating, equity-based funds are one of 2013's most prolific asset-gathering sub-segments of the ETF universe. With interest rates still low on a historical basis and cash-rich companies initiating new payouts or boosting existing dividends at an impressive pace, it stands to reason dividend ETFs would continue to be embraced by investors.
Yet not all dividend ETFs were impervious to the surge in 10-year Treasury yields caused by speculation the Federal Reserve would trim its bond-buying program. Those focused on REITs and MLPs or those funds with large allocations to traditional dividend havens such as consumer staples and utilities felt some pain as tapering chatter caused rates to rise.
Tapering is not dead, but the Fed did confirm it will leave its asset-buying program in place as it currently stands. Should that remain the case over the coming months, income investors should consider the following ETFs.
PowerShares S&P 500 High Dividend Portfolio (NYSE: SPHD)
The PowerShares S&P 500 High Dividend Portfolio will celebrate its first birthday next month and it is fair to say it has been a successful debut year for the fund. At least from an asset-gathering prospective as SPHD now has $135.4 million in assets under management.
Understanding why SPHD has proven popular in a short amount of time is easy. The fund marries two popular concepts: Dividends and low volatility. SPHD tracks the S&P 500 Low Volatility High Dividend Index, which means the fund's holdings are comprised of high-yields stocks that are also low beta names.
That means large allocations to utilities (24.4 percent) and consumer staples (almost 16 percent) and that explains SPHD's somewhat disappointing performance a tapering talk escalated. Eight of the ETF's top-10 holdings are utilities or staples names. SPHD is up about one percent in the past month and offers income investors the advantage of a monthly dividend, something many of its larger rivals do not offer.
WisdomTree U.S. Dividend Growth Fund (NASDAQ: DGRW)
The WisdomTree U.S. Dividend Growth Fund is proof positive investors need not weight on new ETFs to become "seasoned" or mature before jumping in. By no fault of its own, DGRW has an infamous debut date: May 22, the day tapering talk really entered the conversation, but the ETF has proven sturdy since then.
Over the past 90 days, DGRW is up 6.7 percent, a performance that puts it well ahead of the SPDR S&P Dividend ETF (NYSE: SDY) as just one example. DGRW is a "no tapering" play because the ETF should be durable regardless of what the Fed decides to do with its easing program.
The new fund has no exposure to rate-sensitive telecom and utilities names, explaining why it has performed well in recent months. Importantly, DGRW is built to perform in rising rate environments as well. Consumer discretionary and industrials, the two best-performing sectors when rates rise, combine for over 40 percent of the fund's weight.
DGRW also allocates 26 percent of its combined weight to technology and financial services, two of the leaders of S&P 500 dividend growth in recent years, and the ETF pays a monthly dividend.
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Disclosure: Author is long SPHD and DGRW.
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