What’s Your Dividend ETF Strategy for Rising Rates?

MarketsETF Trends

Many expect the Federal Reserve is poised to hike interest rates.

Nevertheless, income-oriented investors can still find some yield-generating opportunities, such as a recently launched dividend exchange traded fund that specifically targets companies with a positive correlation to rising rates.

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Greg Friedman, senior vice-president and head of product development and strategy at Fidelity SelectCo, told ETF Trends that many financial advisors are looking to dividend strategies while also anticipating rising rates.

To meet the rising demand, Fidelity recently launched the Fidelity Dividend ETF for Rising Rates (NYSEArca: FDRR) as part of Fidelity’s new suite of six smart beta ETFs. FDRR is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and grow their dividends and have a positive correlation of returns to increasing 10-year U.S. Treasury yields, according to a prospectus sheet.

The dividend ETF may be a timely play as Donald Trump’s presidential election victory could prompt the Federal Reserve to begin hiking interest rates.

Trump has promised to stimulate faster economic growth with measures like a large tax cut and as much as $1 trillion in infrastructure spending, reports Binyamin Applebaum for the New York Times.

“His market-positive agenda will begin to emerge and, with a Republican Congress behind him, the potential for many of these policies to become law is high,” Stephen Auth, chief investment officer for equities at Federated Investors, told the NY Times.

SEE MORE: Fidelity’s New Spin on a Dividend ETF

Consequently, given the strengthened growth outlook, some are anticipating the Federal Reserve to hike interest rates to keep the economy from overheating.

Meanwhile, Trump may also stimulate inflationary pressures through policy changes such as new barriers to imports.

“We have added U.S. break-even inflation exposure to the portfolio post the Trump win,” Andrew Harman, portfolio manager at First State Investments Ltd., told Bloomberg. “U.S. inflation pressures are expected to be an on-going theme.”

Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks, such as FDRR. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.

Stocks with steady yields reassure investors of a company’s strong financial health. Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return. Over the past 40 years, companies that boost payouts have proven to be less volatile than their counterparts that cut, suspended or did not initiate or raise dividends.

For more information on dividend stocks, visit our dividend ETFs category.

This article was provided by our partners at ETFTrends.