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New ETF Targets Dividend Growth

Stocks in this article: KONOBLSDY

Technology is the largest sector in the fund at 22%, followed by health care and financials at 18%. Utilities and telecom tend to be the highest-yielding sectors but have no exposure in RDVY. Both sectors lagged meaningfully behind the S&P 500 in 2013 perhaps because of their sensitivity to rising interest rates. As the threat of higher interest rates continues to loom over the market RDVY could benefit by not being exposed to these sectors.

Consumer staples also tend to be a higher yielding sector but Coca Cola (KO) is the only stock from that sector and has a 2% weight in the fund.

RDVY's expense ratio is 0.50%, which could be an obstacle for the fund's ability to attract assets. Similar funds from other companies such as the ProShares S&P 500 Aristocrats ETF (NOBL) and the SPDR S&P Dividend ETF (SDY), only charge 0.35%.

From the top down, NOBL and SDY target dividend growth strategies, albeit different from RDVY and with different sector allocations. Compared to RDVY's 22% in tech, NOBL and SDY have 0% and 4%, respectively, which could serve to make RDVY more volatile than its competitors.

NOBL and SDY look for dividend growth over 25 and 20 years whereas RDVY only considers data over the last five years, which is when tech companies started to meaningfully increase their dividends.

One final caveat is that funds that track dividend growth strategies don't necessarily grow their dividends. SDY has been trading for eight years but hasn't actually grown its dividend. Since inception SDY's dividend has mostly trended between 40 cents and 50 cents.

A possible reason for the lack of growth in SDY's dividend could be that when a one stock no longer meets the 20-year requirement for dividend increases it can be replaced by a lower-yielding stock. In the case of SDY, it used to have close to 25% in financial stocks but now only has 16% after many constituents cut their dividends during the financial crisis.

Regardless of whether the dividend grows, the research supporting RDVY still offers a reasonable basis for better price appreciation.   

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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