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Are Dividend ETFs Losing Their Multi-Year Shine? - ETF News And Commentary

Sweta Killa

Dividend stocks and ETFs have enjoyed an incredible journey over the last few years on investors’ drive for higher income amid low interest rates. But these high flying products seem to have hit the brakes this year on rate hike concerns and rising bond yields.

Last month, the Fed signaled that it is on track to raise the first interest rates in nine years even if the economy continues to flourish at its slow pace. Bond yields have risen for much of this year, taking away the sheen from these stocks and putting them under severe pressure for the months to come as well. After hitting a 21-month low of 1.669% in February, the yield on 10-year Treasury bond currently stands at around 2.36%, a sharp increase from 1.927% seen at the end of the first quarter.

If the current trends continue, it could diminish the appeal for dividend products at least in the short term. Further, these stocks are losing their long-lasting preference, as they look expensive at the current levels after stellar multi-year performances. Thanks to this, dividend ETFs have seen a rough stretch with huge outflows so far this year (read: 3 ETFs Yielding Over 6% to Watch as Market Speculates Rising Rates).

The ultra-popular Vanguard Dividend Appreciation ETF (VIG), with an asset base of around $20.5 billion and average daily volume of more than 883,000 shares, pulled out $693.4 million from its asset base so far this year, as per ETF.com. The other most popular funds – iShares Select Dividend ETF (DVY) and SPDR S&P Dividend ETF (SDY) – shed $613.9 million and $465 million, respectively, in thier asset base. VIG and SDY are modestly up 0.5% and 0.1%, respectively, while DVY is down 1%, lagging the 3.6% gains for the broad market fund (SPY).

Will the Trend Reverse?

Nonetheless, dividend products might regain their allure if the stock market is trapped in a web of uncertainty in the months ahead. This is especially true as accelerating job gains, recovering housing fundamentals and regained momentum in inflation rates are lending support to rate hikes, though sluggish consumer spending, weak consumer sentiment in May, and downward revision to first-quarter GDP growth might push back the timeline.

Not to forget, most of the U.S. large companies are sitting on a huge pile of cash and are in a position to increase payouts to their shareholders. The cash reserves will ensure that these companies are not plagued by financial trouble in a rising interest rate environment. As a result, focus on dividend growth securities or the application of some niche strategies to dividend investing rather than betting on the top yielders could be more helpful for an uphill ride in the current rocky market (read: 5 Red Hot Dividend ETFs Yielding 5% or More).

That being said, two new dividend ETFs – First Trust NASDAQ Rising Dividend Achievers ETF (RDVY) and First Trust High Income ETF (FTHI) – are leading the dividend space higher, gaining 4.2% and 3.6%, respectively. Both funds debuted last January and have proven their supremacy over the older and larger counterparts this year.

RDVY provides exposure to the 50 U.S. stocks with a history of raising dividends and exhibit the characteristics to continue to do so in the future. This can be done by tracking the NASDAQ Rising Dividend Achievers Index. The ETF has accumulated $22.5 million in its asset base so far and has a dividend yield of 1.94%. Expense ratio came in at 0.50% (read: 3 Dividend ETFs in Focus on Surging Payouts).

On the other hand, FTHI uses an active management strategy along with index options in order to produce income and provide capital appreciation. The fund primarily focuses on high dividend-paying large-cap stocks and writes covered call options on the S&P 500 index to produce additional cash. These options will use a range of call maturities, and the average time for expiration will be roughly one month. The product has amassed AUM of $5.2 million and charges higher fee of 85 bps in fees per year. It sports a dividend yield of 4.76% annually.

Further, FlexShares Quality Dividend Index Fund (QDF) has also performed better, returning 3.2% in the year. It focuses on quality dividends stocks, which ensure a safe payout and more room for potential dividend growth. QDF has AUM of $677.5 million and a nice dividend yield of 2.74% while the expense ratio is modest at 37 bps.