On a case-by-case basis, the demise of dividend exchange traded funds appears to be greatly exaggerated. Yes, the energy sector is paring payouts and a feverish pace and S&P 500 dividend growth is expected to decline this year, but some payout funds are proving sturdy amid equity market volatility early this year.
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That includes the Elkhorn FTSE RAFI U.S. Equity Income ETF (BATS: ELKU), which debuted about two months ago. Since them, the Elkhorn FTSE RAFI U.S. Equity Income ETF has been nearly 400 basis points less bad than the S&P 500.
ELKU tracks the FTSE RAFI U.S. Equity Income Index, which is designed to measure the performance of high yield stocks in the United States which have been screened to target sustainable income. Index constituents are selected and weighted using four fundamental factors, as opposed to market capitalization, according to Elkhorn.
Home to nearly 160 stocks, ELKU can be viewed as a multi-mission ETF as its objectives include delivering a tidy yield to income investors while steering those investors toward stocks that can consistently grow dividends while skirting those that could be vulnerable to negative dividend action.
With that in mind, ELKU's 11.5 percent weight to the energy could be seen as curious. The same can be said of the ETF's 3.5 percent weight to Chevron Corp. (CVX), which let a lengthy, multi-decade dividend increase streak lapse last year.
In fairness to ELKU, four sectors consumer staples, financial services, consumer discretionary and technology command larger weights in the ETF than does energy. Staples deliver some of the steadiest dividend growth among U.S. stocks while the other three sectors have been delivering some of the biggest dividend growth over on a percentage basis over the past several years.
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ELKU may be a high dividend ETF, but its combined exposure to the interest rate-sensitive telecom and utilities sectors is light at just 5.6 percent. That is something to consider as the Federal Reserve gets closer to raising interest rates. The ETF's weight to those sectors has declined by 200 basis points since the fund came to market.
Todd Shriber owns shares of Johnson & Johnson.
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