What The New Year Could Bring For A New Dividend ETF

With Federal Reserve liftoff here and plenty of market observers saying for months higher interest rates were on the way, with the benefit of hindsight, 2015 looks like inauspicious timing for new dividend exchange traded funds to come to market.

That is particularly of those ETFs framed as high-yield plays chock full of rate-sensitive sectors and asset classes. So give the SPDR S&P 500 High Dividend ETF SPYD, which debuted in October, for debuting at a time that practically assured this rookie ETF would sailing some hard-to-navigate waters.

Dvidend ETFs with robust exposure to rate-sensitive, income-generating asset classes and sectors, such as real estate investment trusts (REITs) and utilities, have been pinched by slack performances and stung by investor departures. Said differently, if it is true that the Fed has missed its window for liftoff and rates are destined to remain low for some time, that is excellent news for a batch of well-known dividend ETFs.

SPYD tracks the S&P 500 High Dividend Index, a benchmark “designed to measure the performance of the top 80 dividend-paying securities in the S&P 500 Index, based on dividend yield,” according to State Street Global Advisors, the third-largest U.S. ETF issuer.

SPYD offers exposure to 15 industry groups with weights ranging from just under 1.7 percent to 14.3 percent. However, the new ETF's largest industry allocations fit the “rate-sensitive” designation. That includes an over 28 percent combined weight to two groups of utilities and a combined 14.4 percent allocation to three types of REITs.

For income investors that are tempted by SPYD, it is worth noting that real estate stocks are not as vulnerable to higher interest rates as some believe and as a Fed tightening cycle moves along, REITs and the corresponding ETFs can actually deliver solid performances. 

That said, although SPYD is a dividend ETF and one with plenty of stocks from what appear to be boring sectors, the rate sensitivity of utilities, telecom and other stocks mean SPYD should not be perceived as a low volatility, at least not at the start of a tightening cycle.

“Index constituents are equally weighted and rebalanced semi-annually. Equal weighting the holdings helps to reduce single security risk that can come with dividend payers,” said State Street.

SPYD's top 10 holdings include Dow components McDonald's Corp. MCD and General Electric Co. GE along with Mattel Inc. MAT and Sysco Inc. SYY. SPYD charges just 0.12 percent a year, or $12 per $10,000 invested. That puts the ETF in lower echelon of dividend ETFs in terms of expenses.