Another dividend ETF with a Treasury-beating yield

Despite rising interest rates, there are still equity-based exchange traded funds that offer attractive returns.

By Benzinga Jun 24, 2013 11:39AM

Stocks circled in newspaper (© Digital Vision/Getty Images)By The ETF Professor


Yields on 10-year U.S. Treasurys currently reside at 2.48%, a significant jump from the 2.13% offered by Uncle Sam's debt on June 3.


Rising yields on what is generally considered a risk-free asset could negatively affect some wildly popular dividend ETFs. It is common sense. Why take on equity risk, now matter how benign, with an ETF that only yields between 2.2% and 2.3% when less risky Treasurys yield more?


Investors who want to remain in dividend ETFs over Treasurys certainly have options when it comes to finding funds with decent yields and superior performance compared to the largest dividend ETFs (Benzinga). A new kid on the dividend ETF block gives investors another choice.


The FlexShares Quality Dividend Defensive ETF (QDEF) debuted in December as part of a three-ETF suite of dividend products (Benzinga). QDEF aims to "target a beta lower than the Parent Index (Northern Trust 1250) and improve on the Parent Index's dividend yield," according to Flex Shares, the ETF unit of Northern Trust (NTRS).


In the six months since its debut, QDEF has accumulated almost $23 million in assets under management while returning 13%. That performance is slightly better than that of the larger Vanguard High Yield Dividend ETF (VYM) and well ahead of the $12 billion iShares Dow Jones Select Dividend Index Fund (DVY), which is up nearly 10% over the same time.


Since inception, QDEF's underlying index has outperformed DVY's index by 330 basis points through the end of May.


QDEF has a 30-day SEC yield of 2.74% and a distribution yield of 3.41%, according to issuer data. Obviously, both of those numbers are better than what 10-year Treasurys offer. To be fair to the other ETFs, QDEF's 30-day SEC yield trails both DVY and VYM.


That does not mean the new ETF is not worthy of consideration in the current market environment. The opposite is true. QDEF's sector weights highlight why the fund could be profitable for investors if interest rates rise. The ETF allocates less than 10.2% of its combined weight to rate-sensitive telecom and utilities stocks. DVY and VYM allocate 31% and 13.4%, respectively, to those sectors.


QDEF also offers robust weights to sectors that will be important drivers of future dividend growth, including financial services and technology (Benzinga). Those sectors combine for nearly a third of QDEF's weight. VYM is not bad on that front with a 22.8% combined weight to those sectors, but DVY devotes a mere 14.3% combined to financials and technology.


QDEF's top-10 holdings include seven Dow stocks with Wells-Fargo (WFC), Altria (MO) and Conoco-Phillips (COP) the outliers. Exxon Mobil (XOM) is the fund's largest holding with a weight of just over 5%.


In the near-term, QDEF is a viable option for investors that want to be involved in dividend stocks even if Treasury yields. Over the long-term, the new ETF's exposure to sectors that will generate future dividend growth (financials and tech) along with a combined 23.3% weight to staples and energy, two groups with impressive track records of payout increases, should serve investors well.


What QDEF will need to separate itself from the dividend ETF pack is outperform funds such as VYM because that fund only charges 0.1% a year compared to 0.37% for QDEF.


More from Benzinga

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

112
112 rated 1
270
270 rated 2
444
444 rated 3
693
693 rated 4
637
637 rated 5
692
692 rated 6
615
615 rated 7
498
498 rated 8
265
265 rated 9
126
126 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.