Various investment factors offer the potential for out-performance over traditional cap-weighted funds and indexes, but factors are cyclical and timing factor cycles can be tricky.
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That is to say there are times when some factors will work and times when leading factors will be laggards, limiting their ability to provide excess returns against cap-weighted benchmarks.
Different Strategies For Different Times
Excess return is defined as the difference in return between a factor index or exchange-traded fund (ETF) and a benchmark index, such as the S&P 500 Index. Assessing excess returns on a rolling basis captures performance in overlapping 12-month periods allowing investors to gauge the consistency of returns over time, said PowerShares in a recent note.
Relating To The Dividend Factor
Although the dividend factor's returns have ebbed a bit in a recent weeks, the NASDAQ US Dividend Achievers 50 Index has been generating significant excess returns against rival dividend indexes over the past year. That index is accessible with the PowerShares High Yield Equity Dividend Achievers Portfolio (PEY).
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Related Link: A Dividend ETF On The Rise
While dividend stocks were believed to be vulnerable to rising interest rates, this group has performed admirably for the past several months due in part to the size and value factors, which are on display in PEY. For example, PEY allocates nearly 30 percent of its weight to financial services and energy names, two sectors that are the cornerstone of many value ETFs.
Using PEY As An Example
As for the size factor, PEY has benefited from the recent surge in small-caps as smaller stocks account for nearly a quarter of the ETF's roster, a high percentage relative to other dividend strategies. Still, the average market value of PEY's holdings is over $50.2 billion.
Last year, PEY gained 31.4 percent, easily topping the S&P 500 and each of the four largest U.S. dividend ETFs.
While US Treasury yields have climbed in recent months, inflation-adjusted interest rates still remain low from a historical perspective, with the 10-year Treasury yield near 2.50 percent and the core consumer price index rising 2.20 percent in December, said PowerShares. This makes dividend-paying stocks attractive, in my view. At the end of January, the dividend yield on the NASDAQ US Dividend Achievers 50 Index was 3.59 percent, which is competitive, in my view.
There is some interest rate sensitivity in PEY as utilities and consumer staples stocks combine for almost 43 percent of the ETF's weight. No sector is as inversely correlated to rising Treasury yields as utilities.
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