Investors flock to US dividend ETFs after Fed rate cut
Since the Federal Reserve began its rate-cutting cycle last month, U.S. ETFs that invest in dividend paying stocks have seen a surge of inflows. However, a rise in U.S. Treasury rates could slow down the inflow of funds.
Morningstar's group of 135 U.S. Dividend ETFs tracked in September brought in $3.05 Billion, the same month that the Fed cut rates by 50 basis point, its first decrease since 2020. This compares with average monthly inflows in 2024 of $424 millions.
Investors are looking for income-generating products to offset the expected decline in yields as the Fed cuts interest rates.
Nick Kalivas is the head of equity ETF and factor strategy at Invesco. He said: "The pivot in monetary policies translates to cash looking for a new home, and dividend-yielding shares will be one of its beneficiaries."
The trend is likely to continue. Benchmark 10-year Treasury yields have been moving higher in recent weeks, and reached two-month highs last Friday. This was after an impressive U.S. jobs report indicated a resilient economy which may not require the Fed to make any more significant cuts this year.
Josh Strange, the founder and president of Good Life Financial Advisors of NOVA said that the renewed interest in dividend stocks was a response to rising valuations, both in tech sectors as well as broader markets. He also noted changes in monetary policies.
According to LSEG Datastream, at 21.5 times estimated future 12-month earnings, the S&P 500 valuation is close to its highest level in 3 years and well above its long term average of 15.7.
Strange stated that "the S&P 500 is becoming increasingly concentrated into a small number of names and the momentum around AI has made these stocks appear frothy."
Dividend ETFs offer yields that vary depending on the strategy. They can range anywhere from less than 2% up to 3.6%. Comparatively, the benchmark yield on 10-year Treasuries fell to 3.6% in September.
Dividend ETFs often include energy and financial stocks, such as JP Morgan Chase, Exxon Mobil, and Chevron Corporation. They also include pharmaceutical companies such as Proctor & Gamble and utilities like Verizon (VZ.N>) or Southern Co., as well retailers like Home Depot.
In the latest issue of Inside ETFs, Sean O'Hara of Pacer, the president of Pacer, discussed the outlook for dividend-paying ETFs.
Pacer creates ETF portfolios that are based on free cash flow to reduce the risk of investing in companies with declining fundamentals. This includes the $24.8 billion Pacer US Cash Cows ETF launched in 2016. In the past 12 months, it has received $7.1 billion of inflows.
(source: Reuters)
