Ten-year Treasury yields have dropped 8.4% this year, providing relief to longer-dated bonds and some income-generating sectors.
Last year’s surge in Treasury yields predictably pressured rate-sensitive sectors such as utilities and telecom, causing some well-known dividend exchange traded funds to lag the broader market. Lofty valuations on consumers staples and utilities shares also hampered some marquee dividend ETFs. [Rising Rates Pressure Some Dividend ETFs]
This year’s retrenchment in Treasury yields has encouraged investors to reconsider some high yield dividend ETFs, including some with either substantial staples or utilities exposure or both. For example, the iShares High Dividend ETF (HDV) and the Vanguard High Dividend Yield ETF (VYM) stand out, having brought in nearly $390 million combined. HDV allocates almost 15% of its weight to utilities stocks. [Utilities Rally Fuels Some Dividend ETFs]
HDV has impressed, raking in almost $207.5 million in assets since the start of the year with over $118 million of that total coming into the fund in just the past week.
HDV, which celebrates its third anniversary next month, has over $3.4 billion in assets under management and is home to 74 stocks. The ETF’s sector lineup shows why investors are once again evaluating the ETF is Treasury yields decline. Utilities, telecom and staples combine for nearly 30% of the ETF’s weight. Adding to the ETF’s allure is a trailing 12-month yield of 3.3% and a beta against the S&P 500 of just 0.85, according to iShares data.
One issue to note with HDV is its heavy exposure to members of the Dow Jones Industrial Average, including some that are heavily shorted by hedge funds. Eight of HDV’s top-10 holdings are Dow members. That group includes AT&T (NYSE: T), Johnson & Johnson (JNJ) and Procter & Gamble (PG), all of which are among the most shorted stocks by hedge funds, according to a recent Goldman Sachs report. [Hedge Funds are Short a Slew of Dow Stocks]
The other side of that equation is if the Dow keeps rising, shorts will be forced to cover, boosting HDV’s holdings and the ETF itself in the process. Outside of HDV’s top-10 lineup, just one other Dow component, DuPont (DD), is found in the ETF. HDV’s top-10 holdings represent 59.5% of the fund’s weight.
HDV tracks the Morningstar Dividend Yield Focus Index, which is comprised of the 75 highest-yielding companies that meet Morningstar’s quality and financial health standards. The annualized performance difference, or tracking error, between HDV and its index has been 0.5%, according to issuer data.
iShares High Dividend ETF