Market Overview

Investors Renew Affinity For Dividend ETFs

Investors Renew Affinity For Dividend ETFs

The Federal Open Market Committee meets this week, and many bond market participants expect the Fed to raise interest rates after having done so three times in 2017.

Expectations of higher borrowing costs have previously been seen as detrimental to dividend stocks and exchange traded funds, but that tide could be turning if last week's ETF inflows paint an accurate picture. Each of the top 10 asset-gathering ETFs for the trading week ended March 16 were equity funds, and three of those products were dividend funds.

The iShares Select Dividend ETF (NASDAQ: DVY) added $3.54 billion in new assets last week, good for the second-best total among all U.S.-listed ETFs.

The DVY Surprise

Against the backdrop of rising interest rates, it is perhaps surprising that DVY would be the top asset gatherer among dividend ETFs. With last week's haul, DVY has added $2.97 billion in new assets this year, tops among all dividend ETFs and good for the sixth-best total among all ETFs.

DVY, which tracks the Dow Jones U.S. Select Dividend Index, holds 97 stocks, over 26 percent of which hail from the rate-sensitive utilities sector. As the Fed boosted borrowing costs three times last year, DVY trailed the S&P 500 and suffered outflows of $848.5 million.

While DVY allocates almost 15 percent of its weight to financial services stocks, a sector believed to benefit from higher interest rates, it's not nearly enough to offset its utilities exposure. The utilities sector is already reflecting the specter of multiple interest rate increases this year as the Utilities Select Sector SPDR (NYSE: XLU), the largest ETF tracking the sector, is down 4.5 percent year-to-date.

Other Prolific Asset Gatherers

Last week, the Schwab U.S. Dividend Equity ETF (NYSE: SCHD) and the Vanguard Dividend Appreciation ETF (NYSE: VIG) also packed on the assets. Investors added $2.33 billion to SCHD and $1.89 billion to VIG. That sent SCHD's year-to-date inflows to $2.72 billion, putting it just behind DVY on the list of 2018's top 10 asset-gathering ETFs.

Neither SCHD nor VIG feature large utilities weights. For example, VIG, the largest U.S. dividend ETF by assets, has utilities exposure of just 1.5 percent compared with its largest sector exposure of 34 percent to industrials.

SCHD devotes just 5.3 percent to utilities stocks, making that the ETF's third-smallest sector weight. The ETF's largest sector allocation is 20.5 percent to financial services.

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