Sep 24, 2020
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Dividend Investing In The Face Of Fed Rate Hikes

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CHICAGO IL – MARCH 03: Federal Reserve Board Chairwoman Janet Yellen (L) speaks with the Executives. [+] To Raise Or Not To Raise That Used To Be The Question: Now as the economy improves the case to normalize rates is back at the table. The us Federal Reserve is taking the lead and told us it wants to raise rates three times in 2017

 

So how do investors make money in that environment? Plenty of financial advisors and investors now more than ever desire a clear understanding about a way to incorporate dividend strategies in their portfolio in this environment. Gallery: The Top 10 Value-Creating Stocks In The World (2016)
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View gallery What Typically Happens To Dividend Strategies In A Rising Rate Environment? Conventional wisdom tells us that interest rate sensitive areas of the market are inclined to under-perform as rates rise

 

Should dividend investors run for the hills? Or is there another method of dividends that’s better suited to rising rate environments? PowerShares by Invesco is an exchange-traded fund (ETF) provider focusing on alternative indexing solutions inclusive of smart beta and factor-based dividend ETFs. Nick Kalivas Senior Equity Strategist at PowerShares said   Income investors usually get squeamish at the sight of rising rates but that shouldn t be the case

 

Some dividend ETFs may be able to provide balance to investors portfolios which could help performance through rising rate environments. What Is Smart-Beta Or Factor-Based Dividend Strategies & How Can It Help You? Put simply smart beta or factor-based dividend ETFs differ from traditional dividend investments in that their strategies and allocations may be designed to preserve performance despite the possibility for higher rates

 

Observing a dividend strategy s factor exposure is simply as important as its sector allocation said Kalivas. Running this sort of analysis may show that a dividend strategy actually has exposure to value and size factors which tend to reply positively to rising rates. It s important to look under the hood of each ETF and know that not all dividend strategies are created equal

 

What Is Factor Based Investing? Without overcomplicating things a factor is a quantifiable characteristic of an asset inclusive of size momentum or value which could help explain the return and risk characteristics of an investment. Factor based investing frequently is the alternative method of traditional market-cap weighting—instead it offers investors a way to diversify their investments from the wider market

 

Like analog technology evolved into digital to meet consumer needs factor-based ETFs represent an evolution from market-weighted investing into more strategic investing vehicles. PROMOTED UNICEF USA BRANDVOICE | Paid Program
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VT Engage Rally The Youth Vote On Campus Few Smart-Beta Or Factor-Based ETFs That You Might Be Interested In: After observing a number of dividend-focused strategies two ETFs stood out to me and are designed to have a right sector allocation and factor exposure for a rising rate environment: PowerShares PEY has outpaced its dividend peers and it also outpaced the benchmark SPY because the election through February – despite a surge in treasury yields

 

PEY has been the finest performing dividend ETF because the 10 year yield bottomed in July 2016. It has done so despite an elevated level of utility exposure. As a balance to its utility exposure it has the best exposure to financials and no REIT exposure. From a factor perspective it has the largest exposure to size (smaller cap)
Size Factor: PEY benefited from its exposure to the smaller cap spectrum and no exposure to REITS

 

Because the election the small-cap Russell 2000 vaulted nearly 18% and that easily outperformed any other major indices. PowerShares SPHD is another dividend ETF that provides a higher indicated yield than its key competitors at 3. 61%. Although sector exposure may be important to interest rate sensitivity factor exposure is also an important driver

 

The price and size factors tend to reply positively to rising rate environments. SPHD and PEY score high in value factor lead relative to their peers. Value: SPHD benefited from its exposure to the price factor. The performance of PEY and SPHD is a case for examining the realm through a factor lens

 

Size and value tend to accomplish well in a rising rate environment. Disclosure: Considered one of my firm s does consulting work for Powershares by Invesco

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