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Worried About Dividend ETFs' Rally? 5 Low P/E Plays for You

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If there’s any equity ETF segment that almost always comes to investors’ rescue, then it is definitely dividend. This year too, the segment has rescued investors to sail through trade tensions.

There have been two main market movers so far in 2019 — U.S.-China trade relation and a dovish Fed. U.S.-China trade relation showed some signs of easing in the first quarter but flared up in the middle of the year and again subsided in October with the signing of the phase-one trade deal. Ebbs and flows in trade tensions raised the appeal for apparently safer choices – dividend stocks and ETFs (read: ETFs to Buy on Phase 1 of U.S.-China Trade Deal).

And citing trade issues and sensing its impact on global growth, the Fed has already enacted three rate hikes. Not only the Fed, but also the ECB harped on the same string. Also, several developed and emerging economies have walked the same route this year (read: Fed Cuts Rates, Signals Pause: Trick or Treat for ETFs?).

This has brought down bond yields materially. Yield on benchmark 10-year U.S. Treasury yield slipped to 1.79% on Nov 4 from 2.66% recorded at the start of the year. Some parts of the yield curve inverted in the middle of this year on cues of recessionary fears.

The accommodative Fed does good for stocks as there will be more months of cheap money inflows. Among stocks, income-producing securities might do even better for investors in search of solid and steady current income.

Rally in Dividend ETFs Make Them Pricey

First Trust’s dividend ETFs have been star performers this year. First Trust NASDAQ Rising Dividend Achievers ETF RDVY, First Trust Dorsey Wright Momentum & Dividend ETF DDIV and First Trust NASDAQ Technology Dividend Index Fund TDIV have returned in the range of 27% to 30% (read: 5 Market-Beating Dividend ETFs of 1H).

Such rally is likely to push up the valuation of dividend ETFs. As per an article published on Market Watch, the price-to-earnings ratio for dividend-heavy utilities fund Utilities Select Sector SPDR Fund XLU (up 21.6% this year) has surged from 15.1x in December 2018 to around 22.8x now, on a trailing 12 month basis, while the price-to-earnings ratio of the S&P 500 has risen from 17.5x to 19.5x.

Against this backdrop, it would prudent to note some low P/E dividend ETFs that could be solid choices in a low-rate environment.

ETFs in Focus

Invesco Emerging Markets Ultra Dividend Revenue ETF REDV – Yield 5.21%; P/E 7.38x

VictoryShares Emerging Market High Dividend Volatility Weighted ETF (CEY - Free Report) – Yield 4.76%; P/E 8.26x

Cambria Emerging Shareholder Yield ETF EYLD – Yield 3.60%; P/E 8.82x

Deep Value ETF DVP – Yield 2.75%; P/E 9.98x

Invesco KBW High Dividend Yield Financial ETF KBWD – Yield 8.70%; P/E 9.99x

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