2 Smart Beta ETFs For Rising Rates

March 21, 2017

Dividend ETF For Rising Rates

Meanwhile, some dividend ETFs, such as the SPDR S&P Dividend (SDY), experienced net outflows year-to-date despite offering exposure to companies with long-term records of dividend increases.

In September 2016, the Fidelity Dividend ETF for Rising Rates (FDRR) launched with a twist on the traditional dividend-growth theme. The proprietary index behind FDRR holds companies that are expected to continue to pay and grow their dividends and have a positive correlation of returns to increasing Treasury yields.

This ETF has a sector-neutral approach, and as such, technology stocks (21% of assets) including AAPL and CSCO, are widely held. Meanwhile, there are utilities (3%) inside, with Exelon Corp as one example.

Kraft Heinz and Walmart (WMT) are among the ETF’s largest consumer staples (9%) holdings and have low CFRA qualitative risk assessments. CFRA equity analyst Joseph Agnese has a buy recommendation on KHC. He thinks the company’s leading market share positions, strong cash flow generation and significant EBITDA margin expansion opportunities positions it well to achieve strong EPS growth over the next three years.

Meanwhile, Agnese believes CFRA strong-buy-recommended WMT is well-positioned to experience accelerated EPS growth over the next three years. He sees WMT growing market share through the implementation of a more aggressive pricing strategy, increases in private label offerings, and improvements in customers’ shopping experience by expanding click-and-collect service.

FDRR Earns Overweight Ranking

Despite also launching less than three years ago, and with only $94 million in assets, CFRA ranks FDRR as overweight. Our ranking is helped by favorable CFRA Stars and overall modest risk consideration attributes.

FDRR was up 6.3% year-to-date, ahead of the 4.5% and 3.5% respective gains for SDY and the Fidelity Core Dividend ETF (FDVV); FDVV focuses on dividend-growth companies but does not incorporate sensitivity to bond yields. 

Source: CFRA, March 17, 2017

With the Federal Reserve raising rates last week and indicating that gradual rate hikes are to be expected throughout the year, CFRA thinks investors should broaden the range of smart-beta products they consider.

While established offerings SDY, SPLV and USMV remain worthy of attention, we contend FDRR and XRLV are next-generation products with some strong attributes.

At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him at @ToddCFRA


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