There might be some good news to come from all this Federal Reserve quantitative easing tapering talk investors have been subjected to over the past few weeks. Should the Fed begin winding down its third version of quantitative easing, that could be perceived as a sign the U.S. economy is improving. That could spark a rally in cyclical sector ETFs.
“If the Fed begins to taper its purchases in keeping with an improving economy, we believe the market should ultimately behave quite well,” writes Liz Ann Sonders, Senior Vice President and Chief Investment Strategist at Charles Schwab, for Barron’s. “There has been some weakness in economic momentum recently, though the weakness has largely been among inflation readings.”
Should that forecast prove accurate, investors will want to examine cyclical ETFs, even if interest rates rise. Given the current environment, Schwab has upgraded their recommendations on industrials to join technology stocks as “outperform” Consumer discretionary was also upgraded to “market perform.” [Cyclical ETFs Can Perform if Rates Rise]
Investors will not want to forget about dividends, though, and there is at least one new dividend ETF that can help investors generate income while taking part in a cyclical rotation. The FlexShares Quality Dividend Index Fund (QDF) debuted in mid-December and has benefited from the flight to yield having accumulated almost $100 million in assets under management.
QDF is designed to deliver of a beta that is comparable to its underlying index, the Northern Trust 1250 Index, while delivering a yield that is in excess of the index’s, according to FlexShares. The weighted average dividend yield on the fund is 3.37% and QDF is up 15.3% this year. Look at QDF this way: It has outperformed the SPDR S&P 500 (SPY) by over 300 basis this year with a yield that is more than 130 basis higher.
What makes QDF attractive right now is its sector mix. Should interest rates rise in earnest, capital intensive sectors such as utilities and telecommunications will be vulnerable. The market has already spoken to that effect. [Interest Rates Dim Utilities ETFs]
That means income investors will want to consider ETFs heavy on those sectors. Fortunately, QDF allocates less than 11% of its total weight to those groups. In better news, the ETF standouts as a credible cyclical rotation play because it does feature a combined 26% weight to technology and energy names.
That is not the only high point, but when an almost 20.3% weight to financials is factored in, it becomes clear that QDF also gives investors ample exposure to those sectors, namely financials and technology, that will lead dividend growth in the coming years. QDF’s sector exposure has already made a difference in terms of returns as the new ETF has outperformed some of its older, larger rivals this year that are more heavily allocated to the staples and utilities sectors.
FlexShares Quality Dividend Index Fund
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.