ProShares examines interest-rate sensitivity of dividend ETFs

May 5th, 2017 | By | Category: Equities

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US ETF provider ProShares has found that dividend-grower strategies have historically outperformed high-dividend-yield strategies in both periods of rising and falling rates.

ProShares examines interest rate sensitivity of dividend ETFs

ProShares has found that dividend grower strategies have historically outperformed high dividend yield strategies in both periods of rising and falling rates.

Dividend-grower strategies target stocks that consistently grow their dividends over time while high-dividend-yield strategies choose to focus on the stocks with the highest dividend yields.

ProShares notes that the two dividend-oriented strategies are constructed differently and may be used to accomplish different objectives. For example, investors seeking a greater-than-average income may choose high-dividend-yield strategies. But these strategies tend to have significant weightings in sectors that are highly sensitive to interest-rate movements, thus introducing interest-rate risk into the equity allocation.

On the other hand, strategies focused on stocks that have grown their dividends consistently (but don’t always have the highest yields) may provide an all-weather dividend solution — one that has the potential to perform well regardless of the direction of rates.

ProShares compared the return to dividend growers and high dividend yielders in different rate environments by examining the performances of the S&P 500 Dividend Aristocrats Index (dividend growers) and the Dow Jones US Select Dividend Index (high-dividend yielders) between May 2005 and March 2017. The S&P 500 Dividend Aristocrats Index measures the performance of S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Dow Jones US Select Dividend Index represents the leading stocks in the US by dividend yield.

The comparison found that dividend growers outperformed whether interest rates increased or decreased. During periods of rising rates, dividend growers returned an average of 11.3% per annum, compared to 8.6% per annum for high dividend yielders, and during periods of falling interest rates dividend growers still outperformed with 10.5% per annum on average compared to 9.1% per annum for high dividend yielders.

ProShares concludes that while high-dividend yielders may provide the higher income many investors crave, they tend to be sensitive to interest rate movements. The latter, on the other hand, offer all-weather potential, having performed well in a variety of interest-rate environments.

ProShares offers the ProShares S&P 500 Dividend Aristocrats ETF (NYSE: NOBL) which tracks the aforementioned S&P 500 Dividend Aristocrats Index. The fund has $2.9bn in assets under management and a total expense ratio (TER) of 0.35%.

European investors wishing to access a dividend-growers strategy may wish to consider the SPDR S&P US Dividend Aristocrats UCITS ETF (LON: UDVD) or the SPDR S&P UK Dividend Aristocrats UCITS ETF (LON: UKDV) which target US or UK stocks that have increased dividends for the last 20 and 10 years, respectively. UDVD has $2.7bn in AUM and a TER of 0.35%, while UKDV is much smaller at £100m in AUM but is slightly cheaper at a TER of 0.30%.

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