Global Chief Investment Officer
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“Defensive sectors,” typically defined as Consumer Staples, Health Care, Utilities and Telecommunication Services, have led the broad large-cap markets to new highs in 2013. These stocks tend to have lower volatility
and lower “betas
,” which means they tend to react less to general movements in the market. As a result, one might not expect them to fully participate in the type of large equity market rally we have experienced so far in 2013.
For those who view the recent gains and valuations
of these defensive dividend sectors as being potentially stretched, we suggest looking down the size spectrum at the mid- and small-cap dividend payers. When viewing the WisdomTree MidCap
and SmallCap Dividend
Indexes, the mid- and small-cap dividend payers tend to be less exposed to these defensive sectors than are large-cap dividend indexes1
. Below we review the defensive sector exposures of some dividend focused indexes.
Defensive Sector Tilts:
For definitions of indexes in the chart, visit our Glossary.
• Large Caps and High-Yield Focus Tend to Over-Weight Defensives
– The large-cap dividend stocks tend to have much larger weight in the defensive sectors than do either the WisdomTree MidCap or SmallCap Dividend Indexes. The Morningstar Dividend Yield Focus Index
has the highest percentage, with nearly 70% weight, in the defensive sectors and its highest exposure in the Health Care sector. The WisdomTree MidCap Dividend Index might make a good complement to that type of exposure, given the fact that it’s the least exposed to the Health Care sector of all dividend indexes on this list.
• Unbalanced Sector Weights
– To achieve such a high over-weight in the defensive sectors, some indexes show significant over-weight in individual sectors. The Dow Jones U.S. Select Dividend Index
, for example, has over 31% exposure in the Utilities sector; the Morningstar Dividend Yield Focus Index has almost 24% exposure in the Health Care sector; and the NASDAQ US Dividend Achievers Select Index
has almost 25% exposure in the Consumer Staples sector.
• The WisdomTree LargeCap Dividend Index
has good representation across all defensive sectors and avoids being substantially over-weight or under-weight in any one particular sector, when compared to the large-cap dividend-focused indexes above. We feel this balanced representation across the different sectors increases the diversification potential and provides potentially broader exposure to the large-cap dividend payers.
• Different Weighting in Mid and Small Caps
– The WisdomTree MidCap and SmallCap Dividend Indexes both have very noticeable differences in sector weights compared to the large caps above. They both have less total exposure to the defensive sectors, as evidenced by their lower weightings in Consumer Staples, Healthcare and Telecom.
Diversification Benefits of Mid and Small Caps
It is impossible to know which sector or sector groups will perform the best going forward, so we believe it is important to remain diversified. Complementing large-cap dividend strategies with mid- and small-cap dividends has the potential to provide increased diversification by balancing the sector allocations of the market. Also, for individuals who feel the defensive sectors have moved too much in early 2013, the mid- and small-cap dividend payers might offer an alternative for capturing the dividend payers without being over-weight in the defensive sectors.
Throughout this piece we refer to the large-cap dividend indexes as a group that includes the Morningstar Dividend Yield Focus Index, Dow Jones U.S. Select Dividend Index, S&P High Yield Dividend Aristocrats Index, NASDAQ US Dividend Achievers Select Index and WisdomTree LargeCap Dividend Index. These indexes were selected because they are some of the largest, based on assets tracking the index.
Important Risks Related to this Article
You cannot directly invest in an index. Diversification does not eliminate the risk of experiencing investment losses. Dividends are not guaranteed and a company’s future abilities to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time. Funds that emphasize investments in small/mid-cap companies generally experience greater price volatility.