Rising interest rates have had the predictable consequence of
weighing on an array of income-generating asset classes and
sectors, including MLPs and REITs.
At the sector level, those vulnerable to soaring Treasury
yields include consumer staples, telecom and utilities.
Although 10-year Treasury yields have slumped 3.2 percent in
the past five days, those yields are still higher by nearly 33
percent over the past 90 days. Hovering around 2.84 percent,
10-year Treasury yields are now higher than some marquee dividend
ETFs, including the Vanguard Dividend Appreciation ETF (NYSE:
Rising Rates A Problem For Some Dividend ETFs
"Starting in May this year, longer-term interest rates in the
U.S. rose considerably on just a hint the Fed could begin
tapering its bond purchases later in the year. Between May 1 and
August 20, 2013, the 10-Year Treasury yield increased 118 basis
points to 2.81%,"
said WisdomTree Research Director Jeremy Schwartz
in a new research note
Dividend ETFs with exposure to rate sensitive sectors, such as
staples and utilities, are prized by investors for relatively low
betas and steadily increasing payouts. However, ETFs that
emphasize backward-looking dividend increase streaks
could be stung if rates climb higher
due to their exposure to rate-sensitive sectors and lack of
exposure to recent dividend growers that hail from sectors that
historically prove sturdy in rising rate environments.
"Looking at specific sectors across the indexes, we see vastly
different constituent performance, which is largely a result of
selection methodology. A closer look at the Consumer
Discretionary sector reveals how the WT SmallCap Earnings and WT
U.S. Dividend Growth Indexes outperformed the Morningstar
Dividend Yield Focus Index by 19.1% and 8.9%, respectively, from
a stock selection basis,"said Schwartz in the note.
ETFs that have held up well in the face of rising rates
include the newly minted WisdomTree U.S. Dividend Growth Fund
). DGRW debuted on May 22, the exact day when Federal Reserve
tapering chatter started, causing a significant spike in 10-year
yields in the process. Still, DGRW is up nearly three percent
since its debut, indicating that its emphasis
on a new generation of dividend growers
can benefit investors even as rates rise.
DGRW has no exposure to telecom and utilities shares. However,
the fund allocates over 60 percent of its combined weight to the
industrial, technology and consumer discretionary sectors.
Discretionary and industrial names are, on a historical basis,
the top-performing sectors
during rise rate environments.
Schwartz notes the benefits of investing in cyclical sectors,
which because of lower yields, are often under-weighted in some
"These sectors are usually tied more closely to economic
growth and tend to perform well when the economy is growing or
expectations are improving. Cyclical sectors are
characteristically some of the lower-yielding sectors, and
indexes that select based on dividend yield are typically
under-weight in these sectors compared to the broad market," he
Technology is now the largest dividend-paying sector in the
U.S. in dollar terms. DGRW has three tech names among its top-10
holdings - Apple (NASDAQ:
), Microsoft (NASDAQ:
) and Intel (NASDAQ:
For more on ETFs, click
Disclosure: Author is long DGRW.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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