Carnage in the oil patch isn't limited to energy stocks and dedicated crude exchange traded funds. Although energy's weight is rapidly dwindling in major equity benchmarks, oil's decline has wide-ranging implications for the broader economy and global equity markets.
In the world of ETFs, oil's demise is gripping predictable fare, such as industry, sector and single-country funds.
But wait. There's more.
Although the sector has been an epicenter of negative dividend action this year, it's increasingly a high-yield play, both at home and abroad. Just look at the Energy Select Sector SPDR (NYSE: XLE). The largest energy ETF is now yielding 14.76%.
That's staggering and as the ETF Research Center (ETFRC) notes, plenty of other ETFs, including some dividend funds, are being hampered by large energy weights. Here are a few examples.
iShares Core High Dividend ETF (HDV)
The iShares Core High Dividend ETF (NYSE: HDV) is a high dividend strategy by design, but with almost a quarter of its weight dedicated to energy stocks, this may not be the high-yield strategy built for these times.
HDV allocates over 16% of its weight to Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) and those dividends are sustainable for this year, but that may be the best news to come from this ETF's outsized energy exposure, which is the highest among non-sector funds.
HDV's energy weight is, predictably, pressuring the fund as its lower by almost 21% year-to-date.
First Trust Morningstar Dividend Leaders Index Fund (FDL)
The First Trust Morningstar Dividend Leaders Index Fund (NYSE: FDL) shares a few of things in common with HDV. Coincidentally, both funds track Morningstar indexes. Exxon is the largest holding in both funds and more importantly, FDL joins its iShares rival in having one of the biggest energy weights among dividend funds.
FDL's energy allocation is almost 23%, the bulk of which is sourced from a combined 17% weight to Exxon and Chevron.
As yield-based strategy, FDL doesn't disappoint with a dividend yield of 6.31%, but the energy exposure implies that yield is high for a reason — one that's not positive.
WisdomTree Emerging Markets High Dividend Fund (DEM)
The WisdomTree Emerging Markets High Dividend Fund (NYSE: DEM), as its name implies, is another high-yield strategy, but with a dividend yield approaching 7%, that's elevated even by this fund's standards.
DEM's energy exposure is mainly attributable to a roughly 18% weight to Russia, which is more than quadruple the weight assigned to that country by the MSCI Emerging Markets Index.
The fund's energy weight is also a tad above 18% and four of its energy components are found among its top 10 holdings. DEM's energy exposure is among the largest for ex-U.S. ETFs.
Disclosure: The author owns shares of DEM.
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