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Banner Year Of Dividend Growth Sends Cash To Dividend ETFs

Summary Dividend growth expected to rise. Financials and technology companies are raising dividends. ETF options to track areas of dividend growth. By Todd Shriber & Tom Lydon U.S. dividend increases fell slightly last year, $54.8 billion from $54.9 billion in 2013, but that modest downtick does little to damage the broader dividend growth thesis. Nor was 2014’s slightly lower level of dividend growth enough to keep investors from pouring billions of new capital into dividend exchange traded funds. Said S&P in a note out Wednesday: According to S&P Dow Jones Indices, 971 dividend increases were reported during the fourth quarter of 2014 compared to the 885 increases which were reported during the fourth quarter of 2013. For all of 2014, 3308 issues increased their payments, up 14.3% from the 2895 issues that increased their payments during 2013. With dividend growth on the rise, investors poured over $10 billion into dividend ETFs last year, once again making payout funds the primary drivers of asset growth for strategic beta ETFs . In 2014, the four largest U.S. dividend ETFs – the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) , the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) , the iShares Select Dividend ETF (NYSEARCA: DVY ) and the SPDR Dividend ETF (NYSEARCA: SDY ) – added over $4.1 billion in new assets combined. Last year, the best-performing dividend ETFs were those with large utilities sector allocations. Buoyed by a significant drop in 10-year Treasury yields, the utilities sector was the best performer in the S&P 500. For example, DVY and the RevenueShares Ultra Dividend ETF (NYSEARCA: RDIV ) returned an average of 16.5% last year. Those ETFs have an average utilities weight of 37.7%. While utilities remain a favorite destination for income investors, dividend growth opportunities continue to appear to in the technology and financial services sectors, the two largest sector weights in the S&P 500. Says Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices: On a sector basis, using the S&P 1500 as the benchmark for U.S. domestic common issues, that 1,012 issues now pay regular cash dividends up from 1,000 in Q3 2014 and 990 at the end of Q2 2014. Nine Financial sector issues increased in Q4, after four issues increased during Q3. As a result, 91.2% of the issues in the Financials sector paid a cash dividend, up from 89.9% in the third quarter. Issues paying a dividend in the Information Technology sector increased to 40.1% from 38.6% in Q3, but remain the sector with the lowest percentage of issues paying. Among ETFs with large weights to financials and tech names, the WisdomTree Total Dividend ETF (NYSEARCA: DTD ) and the WisdomTree U.S. Dividend Growth ETF (NASDAQ: DGRW ) saw robust 2014 asset growth on a percentage basis. DTD, which allocates a combined 34% of its weight financials and tech, added $134.7 million of its $565 million last year. DGRW features a nearly 20% weight to tech, one of the largest weights to that sector among all U.S. dividend ETFs. The ETF added $176 million of its $358.5 million in AUM last year. DGRW and DTD returned an average of 13.4% in 2014. Importantly, there is plenty of room for big bank dividends to grow in 2015. U.S. Bancorp’s (NYSE: USB ) payout would need to rise another 73% just to get back to what the bank paid in 2008. Bank of America’s (NYSE: BAC ) dividend is up 400% this year, but at 5 cents per quarter, that dividend is nowhere close to the 64 cents a share paid for the third quarter of 2008. According to Silverblatt: 2015 should easily set another record for cash dividend payments. A word of caution: while the dollar aggregate of dividend cuts were flat for the fourth quarter, over half the cuts came from energy issues. Lower oil prices and oil price uncertainty, both of which hurt energy stocks over the past six-months and devastated many small-cap energy issues, have spilled over to the dividend world. This is not the financial dividend meltdown of 2008 and 2009, but energy does account for over 11% of dividends in the general market. If lower oil prices cut into earnings and cash-flow, dividends could eventually be hurt. WisdomTree Total Dividend Fund (click to enlarge) Tom Lydon’s clients own shares of DVY. Todd Shriber owns shares of DGRW.

Guide To European Hedged ETFs

Apart from the oil price havoc, Europe has taken center stage globally with the start of the New Year thanks to the struggling economy, political instability in Greece and tumbling Euro. This is especially true as fears of the opposition party’s win in Greece later in the month led to apprehensions of the country’s departure from the Eurozone. Europe is struggling with slow growth, tumbling inflation, higher unemployment and deflation fears that have been stalling the burgeoning Euro zone economic recovery for several months. This is especially true as PMI Composite index, for the Euro zone fell to 51.4 in December from the flash estimate of 51.7. However, it is up from the 16-month low of 51.1 in November, suggesting that economic and business activity in the Eurozone is growing but at an anemic pace. In fact, the PMI Composite index grew by just 0.1% in the final quarter of 2014 driven by continued downturn in France and Italy as well as a faltering Germany, a powerful engine and the largest economy of Europe. Additionally, several months of decline in energy prices has finally trapped Eurozone into deflation for the first time in more than five years. Inflation has turned negative with consumer prices falling 0.2% year over year in December. All these sluggish fundamentals have bolstered the case for aggressive quantitative easing (QE) measures by the European Central Bank (ECB) that might be similar to the policies that the U.S. or U.K. undertook over the past few years. The ECB signaled last week that it could announce a major bond-buying program later this month to reinvigorate growth in the continent and fight deflation. If successful, this will propel the European stocks higher but continue to weigh on the currency. The euro tumbled to a nine-year low of $1.18 against the greenback. The downfall can also be credited to the measures taken by the ECB last year when it cut interest rates to record lows and supported the purchase of some private-sector bonds. Further, the strengthening the U.S. economy and the prospect of rising interest rates sometime in mid 2015 are driving the U.S. dollar upward, thereby resulting in depreciation of the euro against the USD. However, a slumping euro will actually benefit exporters and the manufacturing industry, resulting in soaring stock prices. This is because Japan is primarily an export-oriented economy and a weaker currency makes its exports more competitive. It will also help in improving the regions’ trade balances. Given this, investors may still want to play the European space while simultaneously seeking protection against the sliding euro. Fortunately, there are a handful of euro-hedged ETFs available on the market, any of which could be excellent choices in the current environment. Below, we have profiled some of these in detail for those who are looking for a hedged European ETF exposure at this time: WisdomTree Europe Hedged Equity Index Fund ( HEDJ ) This fund offers exposure to the European stocks while at the same time provides hedge against any fall in the euro. This will be done by tracking the WisdomTree Europe Hedged Equity Index. In total, the fund holds 126 securities with a heavy concentration on the top 10 holdings at 45.4%. However, it is pretty well spread across a number of sectors with consumer staples, industrials, consumer discretionary, financials and health care taking double-digit exposure. Among countries, Germany (26%), France (24.5%), Spain (18%) and the Netherlands (16.7%) dominate the holdings list. HEDJ is one of the popular and liquid choices in the European space with AUM of about $5.5 billion and average daily volume of more than 1.2 million shares. Expense ratio came in at 0.58%. The fund is up 0.2% in the trailing one-year period. Deutsche X-trackers MSCI Europe Hedged Equity ETF ( DBEU ) This product tracks the MSCI Europe US Dollar Hedged Index, which provides exposure to the European equity market and hedges the euro to the U.S. dollar. The fund holds 442 securities in its basket, which is widely spread out across each component with none holding more than 2.92% of assets. United Kingdom takes the top spot at 28.5% while Switzerland, France and Germany round off the next three spots. From a sector look, financials account for the largest share at 22.2% closely followed by consumer staples (19.2%). Other sectors make up for a nice mix in the portfolio with a single-digit allocation. The fund has amassed $723.2 million in its asset base while trades in good average daily volume of more than 310,000 shares. It charges 45 bps in fees per year and returned 0.7% over the past one year. iShares Currency Hedged MSCI EMU ETF ( HEZU ) This product provides local currency performance of stocks from developed market countries within the EMU (European Monetary Union) while managing currency risk as well. It follows the MSCI EMU 100% USD Hedged Index and is a play on the popular iShares MSCI EMU ETF ((NYSEARCA: EZU ) with a hedge to strip out the euro currency exposure. The fund holds 248 well-diversified securities in its basket dominated by financials (22.7%) and followed by consumer discretionary (13.2%) and industrials (12.7%). The ETF has amassed $64.2 million in its asset base since its debut in July 2014 and trades in small volumes of 39,000 shares a day. The fund charges 51 bps in annual fees from investors and has delivered flat returns since its debut. Currency hedge strategies are gaining immense popularity in recent months on a strengthening U.S. dollar and the prospect of higher interest rates. Given a weak Euro and hopes of stimulus, investors could definitely look to these currency hedged ETFs. These products are expected to perform better than the traditional funds if ECB introduces a massive asset buying program.

ETFs To Hideout In While New Trends Take Shape

Summary Uncertainty in the markets can be a scary thing and often prompt ill-timed moves that set your portfolio back from achieving your goals. The unknown is how long will it take for new opportunities to develop and where the most rewarding setups may ultimately materialize. You may be better off seeking out conservative strategies that give you some measure of correlation to stock or bonds. Uncertainty in the markets can be a scary thing and often prompt ill-timed moves that set your portfolio back from achieving your goals. The initial days of trading in 2015 have certainly shown an increase in volatility that may prove to setup new trends in the near future. The SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is more than 4% off its all-time highs and initiating the worst start to a New Year since 2008. The unknown is how long will it take for new opportunities to develop and where the most rewarding setups may ultimately materialize. Patience and discipline may be your best allies when stalking new trends. Instead of just languishing in cash that is paying nothing, you may be better off seeking out conservative strategies that give you some measure of correlation to stock or bonds. These short-term holdings using diversified ETFs that will give you the opportunity for some income , capital appreciation, or both. Short Term Bonds Investors that favor short-term bond ETFs as temporary hideouts may want to check out the iShares 1-3 Year Credit Bond ETF (NYSEARCA: CSJ ) or the Vanguard Short-Term Bond ETF (NYSEARCA: BSV ). CSJ is made up of over 900 investment grade credit securities from both domestic and foreign issuers with an effective duration of less than 2 years. The fund has a yield of approximately 1% and charges an expense ratio of just 0.20%. In addition, the net asset value has been very stable over the last several years. BSV has a similar yield with more government related fixed-income and a slightly higher duration as well. Depending on your broker, you may be able to purchase one or both of these ETFs commission-free in order to be able to trade in or out when needed without eating into income or principal. Asset Allocation Funds If you are looking for a fund that is designed to take less risk than the overall market, you may want to consider an asset allocation fund such as the iShares Conservative Allocation ETF (NYSEARCA: AOK ). This ETF takes a “fund of funds” approach to allocate among stocks, bonds, and cash with the goal being low volatility. AOK is primarily weighted towards investment grade bonds with some select domestic and foreign equities. This provides conservative market correlation with a decent 2% yield. Income is paid on a monthly basis, which is an attractive quality as well. Another new entrant in the asset allocation space with more international exposure is the Cambria Global Asset Allocation ETF (NYSEARCA: GAA ). This ETF is unique in that it takes wider exposure to global asset classes and doesn’t charge an overriding management fee. The fund is currently weighted with 50% bond exposure, 43% stocks, and 7% commodities. GAA can provide heavy diversification in a single low-cost investment vehicle . What’s not to like? The Bottom Line Implementing a plan to navigate a market crossroads, while avoiding too much risk, can be a prudent portfolio management technique for most investors. Having too much cash for long periods of time can breed indecision and lead to a state of paralysis. With these ETFs you can still enjoy some participation in market dynamics with less overall exposure to draw down than a traditional equity or bond fund. They can ultimately be a stepping stone to a more conventional trend or strategy when conditions prove to be more favorable. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.