Dividend stocks and the related exchange traded funds are sure to spend some time in the spotlight in the coming days as the Federal Reserve moves toward its first interest rate hike of 2017. To be precise, financial markets are currently assigning a 92 percent probability on the Fed boosting borrowing costs by 25 basis points.
Some dividend ETFs, namely those with hefty exposure to high-yielding, bond-like sectors, could be pinched by a more hawkish Fed. Conversely, some dividend ETFs are designed specifically to thrive as interest rates climb.
Enter the Fidelity Dividend ETF for Rising Rates FDRR.
FDRR debuted in September as part of a six-ETF suite of smart beta products from Fidelity. That means the ETF is neither old nor has it been around for a full-fledged Fed tightening cycle. However, FDRR did debut before the Fed's December rate hike. The sample sizes aren't large, but FDRR is up 5.6 percent year-to-date and nearly 11 percent since coming to market.
FDRR tracks the Fidelity Dividend Index for Rising Rates. That index is “designed to reflect the performance of stocks of large- and mid-cap dividend-paying companies that are expected to continue to pay and grow their dividends and have a positive correlation of returns to increasing 10-year U.S. Treasury yields,” according to Fidelity.
Since FDRR's name implies one of its objectives is to deliver the advantages of dividends in the face of higher interest rates, investors are apt to have some basic sector-level requirements. FDRR obliges as its combined weight to rate-sensitive real estate, telecom and utilities is just 10 percent.
Conversely, it would be reasonable to expect that FDRR would be sufficiently allocated to sectors that are cyclical, home to companies with large stockpiles of free cash or both. FDRR indulges that reasonable request as well as technology, financial services and healthcare stocks combine for about half of the ETF's weight. FDRR's top 10 holdings, which include six members of the Dow Jones Industrial Average, combine for about 24 percent of the ETF's roster.
FDRR charges 0.29 percent per year, a fee that's slightly above the average U.S. ETF, but favorable among smart beta fees. The new Fidelity ETF had $78.2 million in assets under management as of the end of February.
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