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.

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