How Treasury Yields Are Affecting Some Dividend ETFs

It is a song that has been played plenty of times this year. Ten-year Treasury yields are off 23.3 percent, a decline that has helped make utilities the best-performing sector. With utilities being the best-performing S&P 500 sector, some dividend ETFs that emphasize high-yield stocks are predictably benefiting.

At the very least, these ETFs are generating positive returns at a time when the S&P 500 is still off on the year. Year-to-date, the iShares Select Dividend ETF DVY is higher by 1.9 percent compared to a 5.1 percent decline for the S&P 500. DVY, one of the largest U.S. dividend ETFs, devotes a whopping 35.3 percent of its weight to the utilities sector. That is more than double its weight to consumer staples, its second-largest sector weight.

“Some investors say the dividend bet is riskier than it may appear. Dividend- paying stocks often suffer when rates increase, because investors have less need for these payouts when interest rates on safe bonds are rising, and some economists say resurgent U.S. growth later this year could put the Fed back on track for more rate increases,” reports the Wall Street Journal.

While the Utilities Select Sector SPDR XLU, the largest utilities ETF, has been a prolific asset gatherer this year, interest rate concerns could explain why investors have pulled money from dividend ETFs that have large utilities allocations. That includes DVY. 

The PowerShares S&P 500 High Dividend Low Volatility Portfolio SPHD is one ETF bucking that trend. Home to an 18.6 percent utilities weight, the ETF's second-largest sector allocation, SPHD has added $155.1 million in new assets this year. That is good for the fourth-best total among all PowerShares ETFs, according to issuer data.

More importantly, SPHD is up 2.7 percent year-to-date and was one of just three ETFs to hit 52-week highs on Monday. SPHD is covered in case rates rise with almost 34 percent combined exposure to cyclical financial services and industrial stocks.

SPHD, which has a trailing 12-month dividend yield of almost 3.5 percent, pays a monthly dividend. That is an important trait for older investors looking for a steady income stream and for young investors looking to more fully exploit the advantages of compounding.

SPHD's underlying index, “the S&P 500 Low Volatility High Dividend Index, combines two defensive factors. The index seeks to include the 50 least-volatile, high-dividend-yielding securities in the S&P 500 and is rebalanced on a semiannual basis. The methodology for the S&P 500 Low Volatility High Dividend Index recognizes companies for their yield, but not the longevity of payments,” according to S&P Capital IQ.

Todd Shriber owns shares of SPHD.