ETF of the Week: SmartETFs Dividend Builder ETF - DIVS

This ETF offers exposure to small cap U.S. stocks that maintain attractive dividend yields, making it one of many tools available to investors looking to enhance the current returns delivered from the equity side of their portfolios. DIVS can be used in several different ways: this ETF might be an appealing short-term tactical tool for those looking to shift holdings toward safer dividend stocks, or could also be used as a core holding in place of a more traditional small cap fund in a long-term portfolio.

DIVS provides a dividend strategy that targets both strong fundamentals and dividend growth over time. Traditional fixed income comes with higher risks and lower yields in the current market environment.

The traditional rationale for using fixed income assets has been eroded as yields are at all-time lows, correlation is higher, and many are now exposed to rising rate risks. With yields so low, the risk-return relationship is backward. There’s only about 1% of room for interest rates to go down, and they can absolutely go up.

The Federal Reserve has more or less exhausted its toolkit with interest rates already at historical near-zero lows. Consequently, traditional fixed income investors are now exposed to greater interest rate risk, as rates are likely to tick higher.

The U.S. Aggregate Bond Index shows a 1.39% yield, as compared to the S&P 500’s 1.32% yield. Additionally, in looking at the past 35-year-average annual returns, the Agg generated a 6.16% return, as compared to the S&P 500’s 10.86% return.

Divided-paying companies can, over the long-term, provide a potential inflation hedge. Dividend strategies focusing on high dividends and a history of dividends are flawed since they often fail to identify which factors are generating those dividends. Instead, dividend-growing companies generate strong free cash flows, have management focused on creating shareholder value, show a disciplined use of cash, come with high-performance expectations, and possess built-in value with historically low volatility.

Additionally, dividend growers have historically exhibited the lowest risk by the standard deviation of returns, compared to dividend payers, highest-yield dividend payers, and non-dividend payers. Meanwhile, dividend growers have shown relatively similar returns to non-dividend payers.

DIVS has also exhibited improved drawdowns during periods of heightened volatility. The fund captured only 72% of market downside on average in the 5 corrections seen since the fund launched at the end of 2010.

This article originally appeared on ETFTrends.com