A Decadent Defensive Dividend ETF

A volatile start to the year for equities has investors craving safe-haven assets. In past periods of volatility, safe-haven assets have included dividend stocks and exchange traded funds, but with S&P 500 dividend slowing, some income investors are giving dividends the cold shoulder.

The WisdomTree High Dividend Fund DHS is one way for investors to maintain dividend exposure while playing defense. DHS's underlying index, the WisdomTree High Dividend Index (WTHYE) “is dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share,” according to WisdomTree.

Although energy dividends are under fire, the sector is the second-largest in DHS at 14.9 percent, trailing consumer staples by 350 basis points. DHS also has some leverage to declining Treasury yields as rate-sensitive utilities and telecom stocks combine for over 22 percent of the ETF's weight. 

“We screened all the WisdomTree equity Funds in search of what has been our most defensive equity Fund thus far in 2016. The answer: the WisdomTree High Dividend Fund (DHS). The Index it tracks, the WisdomTree High Dividend Index, declined just 3.2% through February 15 at a time when the S&P 500 Index had declined by 8.5%. The WisdomTree High Dividend Index is exhibiting three characteristics that investors typically search for in choppy markets: defensive sector exposure, lower beta and a healthy dividend yield,” said WisdomTree Chief Investment Strategist Luciano Siracusano in a new note.

Through Monday, DHS is down just 1.3 percent year-to-date, easy topping plenty of rival dividend ETFs, including two Vanguard funds.

Defense is making a difference for DHS this year as the ETF devotes nearly half its combined weight to defense consumer staples, utilities, telecom and healthcare stocks. Seven of the ETF's top 10 holdings hail from three of those groups. Eight of the top 10 holdings in DHS are Dow components with AT&T Inc. T and Phillip Morris Intentional PM being the outliers.

Importantly, the quality/value combination bears fruit. Over the past five years, 12 months and year-to-date, the index DHS tracks has outperformed the Russell 1000 Value Index, according to WisdomTree data.

“By selecting stocks based on high dividend yields and then weighting them based on the dollar value of regular cash dividends paid to shareholders, the WisdomTree High Dividend Index typically exhibits a value tilt. However, by focusing on dividends in the selection and weighting process—unlike some market cap-weighted value indexes—this strategy typically generates a higher starting dividend yield and greater overall exposure to the 'defensive sectors' of the market,” adds Siracusano.