A Quality Dividend ETF For Today's Tumultuous Rate Environment

Last week, the Federal Reserve opted to maintain its zero interest rate policy (ZIRP). Now, market participants turn their attention to the Fed's October and December meetings, the central bank's remaining 2015 meetings, as possible “liftoff” dates.

That means markets are not out of the rate hike woods for 2015. Not by a long shot. With that in mind, it is advisable for investors to keep their eye on the ball when it comes to which corners of the world of exchange traded funds that can thrive when ZIRP finally meets its end. 

Although there has been ample chatter about the reprieve granted to dividend ETFs in the wake of the Fed continuing ZIRP, there are some payout funds that, by design or not, are prepared to deliver even if the Fed does increase borrowing costs. That group includes the WisdomTree U.S. Quality Dividend Growth Fund DGRW.

The $485.1 million DGRW, which came to market in May 2013, tracks the WisdomTree U.S. Quality Dividend Growth Index (WTDGI). That benchmark “is comprised of the 300 companies in the WisdomTree Dividend Index with the best combined rank of growth and quality factors,” according to WisdomTree. 

Against the backdrop of a (potentially) rising rate environment, DGRW makes sense for investors in need of current income and for younger investors looking for an ETF that can be bought and held over long time frames. DGRW's top three sector weights – consumer discretionary, technology and industrials – are all cyclical sectors and cyclical groups historically perform well following Fed liftoff. 

DGRW also offers post-liftoff advantages by way of the sectors and industries it excludes. The ETF's underlying “Index selects stocks with strong growth and quality characteristics, leading to a nearly 0% exposure to Utilities and real estate investment trusts (REITs). Because of its tilt away from these higher-yielding segments of U.S. equities—segments that have been bid up in price as U.S. interest rates have remained low—it also is able to achieve these strong growth and quality characteristics with a very similar price-to earnings (P/E) ratio as the S&P 500 Index,” according to a recent WisdomTree research note.

One potential drawback of DGRW in a rising rates environment is that, as WisdomTree notes, the ETF's nearly 300 holdings derive an average of just 58 percent of their revenue on a domestic basis. Meaning those companies derive a significant portion of their revenue from international markets, which can be problematic when the dollar strengthens. DGRW's top 10 holdings include Apple Inc. AAPL, PepsiCo. Inc. PEP and McDonald's Corp. MCD, each of which garners a significant chunk of its revenue outside of the U.S.

That has been something of a drag on DGRW this year as the ETF is off almost six percent, but that is still superior to the average year-to-date loss of 7.7 percent turned in by the four largest U.S. dividend ETFs.

Todd Shriber owns DGRW in a retirement account with no plans to sell.