Assessing Dividend ETFs in a Rising-Rate Environment
Near-term interest-rate risk doesn't change the core qualities that investors should look for in dividend-strategy exchange-traded funds.
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Despite the Federal Reserve's pullback on its tapering plans, investors remain spooked by the prospect of rising rates this Halloween season. Fixed-income investors aren't the only ones with cause to worry; dividend exchange-traded funds, a popular strategy during the recent years of record low rates, are also sensitive to rate increases. Dividend ETFs are not made equal, however. Their portfolios can vary widely from strategy to strategy depending on the methodologies of the indexes they track. Two of the largest dividend-strategy ETFs, Vanguard Dividend Appreciation ETF (VIG) and iShares Select Dividend (DVY), have such different methodologies that only 17% of their portfolios overlap. So, because dividend strategies can differ so much, they'll be impacted differently by rate increases. Today, we pop the hood and see which of the largest and most popular dividend-strategy ETFs are most appropriately positioned to help investors gather dividend income without taking on significant interest-rate risk.
Abby Woodham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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