Alright, so assuming you don’t live under a rock, you should know by now that the Federal Reserve, once again, delayed raising interest rates following the conclusion of its September meeting on Thursday. Word on the street is that the Fed will forego raising rates for the rest of this year and that markets are fully pricing in a rate increase for March 2016.
It seems like markets have been “pricing in” a rate increase for all of this year. That much is confirmed by the laggard performances turned in by previously beloved, but extremely rate-sensitive, income-generating exchange-traded funds such as the Utilities SPDR (XLU) and the Vanguard U.S. REIT ETF (VNQ). Both ETFs are the largest in their sectors, and are off 9.1% and 5.6%, respectively, this year.
Much of those declines are attributable to market participants betting the Fed would raise rates. That has not happened. We witnessed the same sentiment in 2013, when everyone thought higher rates were coming that year.
That is to say, market pundits can opine about rates rising sometime before the end of 2015 or at some point in 2016, but conjecture is not a guarantee of an event to come.
Looking at the situation with the Fed from a more actionable level, it could be time for income investors to revisit some dividend ETFs that have been stymied by Fed speculation this year, but could stand to benefit now that a rate hike doesn’t appear as imminent as previously believed.
An ideal place to start would be with the following dividend ETFs.
“No Hike” Dividend ETFs to Buy: PowerShares S&P 500 High Dividend Portfolio (SPHD)
Dividend Yield: 3.6%
All things considered, the PowerShares S&P 500 High Dividend Portfolio (SPHD) has been remarkably durable with a year-to-date loss of just half a percent. That is impressive when noting SPHD devotes almost a third of its weight to rate-sensitive utilities and telecom stocks.
Historical data indicates telecom stocks are rather dreadful in the months and full year following Fed liftoff, and utilities are not much better.
SPHD also has a nearly 16% allocation to consumer staples stocks, another sector that is perceived as vulnerable to rising rates. Plus, the ETF devotes just 7.3% on a combined basis to energy and technology names — typically the best-performing sectors after Fed liftoff.
Add all this up and SPHD’s 2015 showing has bested the broader market, but now that the Fed is delaying hawkish, things could even better. SPHD’s utilities exposure could shift from burden to blessing and the ETF’s 20% financial services looks better now because a dirty secret is that financials actually become laggards after the Fed raises rates after rising in anticipation of higher rates.
For those not familiar with SPHD, this dividend ETF can be seen as the high-dividend version of the popular PowerShares S&P 500 Low Volatility ETF (SPLV).
SPHD, which pays its dividend monthly (good news for income investors), charges 0.3% per year, or $30 per $10,000 invested.
“No Hike” Dividend ETFs to Buy: WisdomTree Dividend ex-Financials Fund (DTN)
Dividend Yield: 3.6%
Yes, the WisdomTree Dividend ex-Financials Fund (DTN) makes good on the promise of its name and does not hold financial services stocks. That, plus a combined 29.5% weight to rate-sensitive utilities and consumer staples stocks, explains why DTN has fallen more than 8% year-to-date.
What did not work in anticipation of interest rates, however, has the potential to work now that markets know it could be six months or more before rates do jump. In more sanguine/normal market environments, DTN is a dividend ETF with a lot to like.
Even when interest rates do rise, investors will eventually move past DTN’s utilities exposure, because this dividend ETF has enough exposure to cyclical sectors (the groups that should perform well when borrowing costs climb) to endure. Consumer discretionary, technology and energy names combine for over 35% of DTN’s weight.
Like the aforementioned SPHD, DTN is a dividend ETF that delivers its payout monthly, a nice bonus for investors looking for a steady income stream.
DTN charges 0.38% per year.
“No Hike” Dividend ETFs to Buy: iShares Select Dividend ETF (DVY)
Dividend Yield: 3.5%
The $13 billion iShares Select Dividend ETF (DVY) is one of the largest U.S. dividend ETFs, and it is the epitome of what happens to utilities-heavy funds when investors think the Fed is about to turn hawkish.
DVY was a dividend ETF star last year when Treasury yields slid, but the reverse has been true this year, as a 32.5% utilities weight has sent the iShares fund to a 7% loss.
Investors have responded by pulling $1.5 billion from DVY, according to ETF.com data. Harsh treatment to be sure, but there has been good reason for utilities stocks to be out of favor. Now that reason, at least for a few months, is gone.
DVY, which is home to 99 stocks, carries an annual expense ratio of 0.39%.
As of this writing, Todd Shriber was long shares of SPHD in a retirement account.
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