Owing in part to a recent decline in Treasury yields, the previously hot cyclical value trade just lost some momentum, but some market observers believe there’s still a case for related strategies.
That could be supportive of exchange traded funds like the ALPS Sector Dividend Dogs ETF (SDOG ). SDOG yields 3.10%, which is quite impressive by today’s standards. The fund is higher by 17.07% year-to-date, an advantage of about 100 basis points over the S&P 500.
While SDOG pulled back over the past month, inflation, particularly if it’s persistent, could propel the fund higher.
“One of these inflation hedges is value-oriented equities. Our analysis of data dating back to 1927 found that value stocks have historically realized the greatest outperformance over their growth counterparts in periods of moderate to high inflation. It is only when inflation is very low that value performance pales — as evidenced in the past 10 years,” according to BlackRock.
The Cyclical Bend
One benefit offered by SDOG is that its sector exposures are equally weighted, meaning it holds bigger weights to cyclical fare than those found in the S&P 500. That’s been a plus this year and could serve as a catalyst if cyclical names return to the form established earlier this year.
“Economically sensitive cyclical stocks have had a very strong run since the announcement of effective vaccines in November. We don’t think their full potential is exhausted, but selectivity is more important now,” notes BlackRock.
It’s possible to play that selectivity with SDOG because, although the fund is positioned as a high dividend strategy, there’s some quality elements to be had too. For example, dividends are back to growing in the financial services sector – a prime cyclical value destination – and energy companies are on stronger financial footing than they were a year ago.
SDOG offering some exposure to quality is conducive to the current environment because quality stocks are inexpensive and usually perform well when the Federal Reserves tapers asset-buying programs.
“We increasingly believe many of the easy early-cycle investment opportunities have been acknowledged and exploited,” says BlackRock. “While some cyclicals still have room to run, we see an opportunity to also turn attention to quality stocks as the cycle’s next beneficiaries.”
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