Income And Caution With This Dividend ETF
Summary Dividend ETFs may generate attractive yields, but they are exposed to rate-sensitive sectors. Highlight of the First Trust Value Line Dividend Index Fund. Significant utilities sector position is weighing in on performance. By Todd Shriber & Tom Lydon With Treasury yields rising and concerns that the Federal Reserve will boost interest rates in the coming months doing the same, some dividend exchange traded funds are lagging broader benchmarks. That is true of the First Trust Value Line Dividend Index ETF (NYSEARCA: FVD ) , which has traded modestly lower this year while the S&P 500 has gained 2.5%. FVD follows the Value Line Dividend Index, which equally weights components and utilizes the proprietary Value Line research to select components. Specifically, stocks are ranked by the Value Line Safety Ranking of 1 or 2 out of 5, which are based on price stability and financial strength. Additionally, the index excludes stocks with a dividend yield lower than the S&P 500. “Over the last 10 years, FVD produced an annual average 10.4% gain vs. 7.9% for the S&P 500,” according to Investor’s Business Daily . “Their difference in their current dividend yield is modest. FVD yields 2.2% and SPY 1.9%.” Though its yield is attractive relative to the S&P 500, it is the source of that yield that could be a strike against FVD in a rising rate environment. Specifically, the ETF allocates 22.6% of its weight to utilities stocks, the most vulnerable group to rising interest rates . FVD devotes another 13.5% of its weight to consumer staples stocks, another sector that historically lags when interest rates climb. FVD’s utilities and staples exposure is somewhat offset by a combined 32.3% weight to financial services and industrials names, groups that often perform as Fed policy turns hawkish. Rising Treasury yields and slumping utilities stocks have not been enough to sour investors on FVD. The ETF is home to nearly $1.21 billion in assets under management up from $955 million in October. The ETF’s technology weight of 8.1% is fair among dividend funds, but FVD allocates less than 2% to telecom, another highly rate-sensitive sector. FVD’s holdings are also equally weighted. FVD currently shows 187 holdings and its largest component stocks only make up 0.65% of the underlying portfolio. However, this strategic beta index-based ETF is more costly than the average dividend ETF. FVD shows a 0.70% expense ratio, compared to the average 0.58% expense ratio for dividend yield weighted ETFs and 0.5% expense ratio for the average dividend weighted ETF, according to XTF data. At 0.7%, FVD is twice as expensive as the SPDR S&P Dividend ETF (NYSEARCA: SDY ) and seven times as expensive as the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) . First Trust Value Line Dividend Index Fund (click to enlarge) Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
