Market Overview

Just As It Sort Of Perked up, A Dividend ETF Lost More Money

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Exchange traded funds flows data, both the arriving and departing varieties, is not always an accurate harbinger of an ETF's future returns.

During July, that was the case for the iShares Select Dividend ETF (NYSE: DVY). This is the abridged version of DVY's tale of woe through the first half of 2015: Thanks to its 32.3 percent utilities weight, DVY is off nearly 4 percent year-to-date after losing $910 million in assets in the first six months of the year.

DVY, one of the largest U.S. dividend ETFs, also features an 11.3 percent weight to consumer staples stocks, another rate-sensitive group. That is to say with Treasury yields rising and investors fretting that the Federal Reserve is close to raising interest rates, it makes sense that DVY lost ground and assets.

However, investors may have been too hasty in hitting the sell button on DVY. Even with Friday's modest loss, the ETF closed July with a gain of about 1 percent, but as of July 30, investors had pulled another $307.6 million from the fund. Only eight ETFs lost more money in July than DVY.

Departures from DVY continued as investors bid up defensive consumer staples and utilities stocks, sectors that combine for almost 44 percent of DVY's weight. The Consumer Staples Select Sector SPDR (NYSE: XLP) and the Utilities Select SPDR (NYSE: XLU) each gained more than 4 percent in July and were bolstered late in the month as the Fed once again put off raising rates until later in the year.

By the end of July, XLP and XLU, the largest consumer staples and utilities ETFs, respectively, were easily the month's top performers among the nine sector SPDRs. As noted throughout the week, staples ETFs have been consistently making all-time highs. Six such funds did just that on Friday, a data point that underscores the hastiness in leaving DVY.

While DVY's arguably excessive weight to utilities stocks has been and can again be a drain on the ETF when Treasury yields rise, the fund has some avenues for fighting that vulnerability. Often overlooked in analyzing the fund's sector weights is a combined 24 percent weight to financial services and consumer discretionary stocks. Those two sectors are, historically, among, the best performers when interest rates rise.

DVY, which holds 99 stocks, does compensate investors for the rate risk. The ETF has a trailing 12-month dividend yield of 3.26 percent, or 106 basis points above where 10-year yields closed on Friday.

Posted-In: Long Ideas Broad U.S. Equity ETFs Dividends Specialty ETFs Markets Trading Ideas ETFs

 

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