New Dividend ETF Is A Bet On Rates Remaining Low
Although the Federal Reserve has yet to boost interest rates, there has been ample speculation this year about when the central bank will do that and that speculation has weighed on plenty of exchange traded funds emphasizing dividends.
To be precise, dividend ETFs with robust exposure to rate-sensitive, income-generating asset classes and sectors, such as real estate investment trusts (REITs) and utilities, have been pinched by slack performances and stung by investor departures. Said differently, if it is true that the Fed has missed its window for liftoff and rates are destined to remain low for some time, that is excellent news for a batch of well-known dividend ETFs.
That scenario is also likely to benefit the SPDR S&P 500 High Dividend ETF (NYSE: SPYD), which debuted today. The new ETF follows the S&P 500 High Dividend Index, a benchmark “designed to measure the performance of the top 80 dividend-paying securities in the S&P 500 Index, based on dividend yield,” according to State Street Global Advisors, the third-largest U.S. ETF issuer.
Indeed, SPYD makes good on the high dividend promise as its underlying index had a dividend yield of 3.97 percent as of Oct. 19, according to issuer data. That is nearly double the yield on 10-year U.S. Treasurys at this writing.
Although SPYD is obviously in its infancy, it is not a stretch to say this ETF will have some sensitivity to interest rates. Approximately 30 percent of the new ETF's weight is allocated to various parts of the utilities sector. Additionally, SPYD's REIT exposure is north of 14 percent and nearly five percent of the ETF is allocated to rate-sensitive telecom stocks. Four of the SPYD's top 10 holdings are either utilities, REITs or telecom stocks. No stock commands a weight of more than 1.59 percent in SPYD.
“Index constituents are equally weighted and rebalanced semi-annually. Equal weighting the holdings helps to reduce single security risk that can come with dividend payers,” said State Street.
SPYD is State Street's sixth dividend ETF and the second introduced by the issuer this year. The SPDR S&P International Dividend Currency Hedged ETF (NYSE: HDWX) debuted last month. State Street issues the $12.5 billion SPDR S&P Dividend ETF (NYSE: SDY), one of the largest U.S. dividend ETFs.
SPYD charges just 0.12 percent a year, or $12 per $10,000 invested, putting the new ETF at the bottom end of dividend funds as ranked by annual fees.
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