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Fight Rising Rates With This Dividend ETF


The June jobs report showed the addition of 195,000 new jobs, enough to spark a rally in U.S. stocks. That equity rally plagued bonds on speculation the Federal Reserve could begin tapering its quantitative easing program as soon as September, sending yields on 10-year U.S. Treasurys surging almost 8.6% to 2.71%.

Soaring Treasury yields are trimming the universe of dividend ETFs that yield more than government bonds down in a significant fashion. However, it pays to remember varying yields in dividend ETFs reflect the different methodologies baked into the funds’ tracking benchmarks. Investors should be comfortable with how a dividend ETF works before buying in. [Largest Dividend ETFs Yield Less Than Treasurys]

One ETF that breaks from the often-used methodology of focusing on dividend increase streaks could also prove useful for income investors in a rising rate environment. That ETF is the FlexShares Quality Dividend Defensive Index Fund (QDEF) , which has a 30-day SEC yield of 2.74%, slightly above what investors will get on 10-year Treasurys. QDEF’s weighted average yield is a solid 3.33%.

QDEF is part of a three-ETF suite of dividend products introduced by FlexShares last December. That group included the FlexShares Quality Dividend Index Fund (QDF) and like QDF, QDEF also offers investors exposure to the cyclical rotation theme. Additionally, QDEF, compared to some of the older dividend ETFs on the market today, is light on some of the sectors that could prove vulnerable should rates continue rising. Utilities and telecom names combine for less than 10% of QDEF’s weight. [A New Dividend ETF With The Right Sector Mix]

Although QDEF is not focused on dividend growth per se, the ETF is overweight financial services stocks, which have been a leading source of S&P 500 dividend growth in the past three years. The new ETF has a 17.9% weight to that sector compared to 16.7% for the S&P 500. Conservative investors will also find something to like with QDEF as the fund also overweights consumer staples with a 12.5% weight compared to 10.5% in the S&P 500.

QDEF uses a quality factor “and an optimization process that seeks to maximize this factor, target a beta lower than the Parent Index (Northern Trust 1250) and improve on the Parent Index’s dividend yield,” according to FlexShares. The fund’s top-10 holdings are similar to what investors find with more established dividend ETFs and that group includes Exxon Mobil (XOM), Pfizer (PFE) and Chevron (CVX).

Of course, income investors want to know why they should be motivated to trade in a tried-and-true dividend ETF for a new kid on the block. If QDEF’s Treasury-beating yield is not its top selling point, the ETFs returns should be. Over the past six months, the three largest U.S. dividend ETFs by assets are each up about 10%. QDEF is up 19.2% over the same time.

FlexShares Quality Dividend Defensive 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.