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        Weekly ETF Brief

        A Balanced Approach in US Equities is Starting to Pay Dividends

        Since the beginning of Q3, the strong relative performance of US Dividend Aristocrats has been a tailwind for investors playing volatility through a balanced approach.

        2 min read
        Ryan Reardon
        Senior Equity ETF Strategist

        In the third quarter of 2024, we expected investors to see increased opportunity along the market capitalisation (cap) spectrum. We also highlighted the risk of being overweight market leadership sectors (e.g., technology and communication services) if the market experienced an uptick in volatility. Market breadth and volatility have been major market themes this earnings season. This has led to strong outperformance in dividend stocks this quarter (see Figure 1). 

        The size (lower market cap) and yield (higher dividend) factors have both outperformed the market thus far this quarter. When we analyse investor flows and positioning, we have not observed a significant shift into these market factors from under to overweight. Underweight positioning may provide support for this trade to continue into year end, especially with lower rates on the horizon. 

        Figure 1: US Dividend Aristocrats Index Q3 Returns

        Compared to S&P 500

        Chart shows a stacked column and scatter overlay to breakdown the allocation, selection, and interaction effect attribution to performance for each sector.

        Dividend Sectors Supported by Uptick in Volatility

        The key to Dividend Aristocrats outperformance in the third quarter has been the rally in defensive US equity sectors. Through 13 September, defensive sectors Real Estate (+18%), Utilities (+15%), and Consumer Staples (+10%) have been the best performing sectors in the S&P 500® Index. In our third quarter market outlook, we encouraged investors to expand scope and take on a more defensive posture. This was supported by improving earnings revisions in small caps, an opportunity to diversify away from the market-leading GICS sectors, and the potential for a higher volatility environment. 

        The volatility index (VIX) had begun to move higher at the end of the second quarter after two years of steady decline. At the time, we suggested that investors consider the potential for higher levels of volatility heading into a contentious US election season. This continues to be a major top-down market theme for investors. Historically, periods of elevated and extreme volatility regimes are when Dividend Aristocrats offer the strongest relative outperformance against the market benchmark. 

        As we approach the close of the third quarter, we would continue to encourage investors to seek an opportunity in the underweight sectors and factors of the US equity market. We still see historically overcrowded positioning in market leadership which would support a continued reversion to a broad-based allocation in equities. Dividend Aristocrats offer investors an opportunity to play the diversification story while also introducing a defensive tilt, which has historically outperformed in higher volatility regimes.

        How to Access the Theme 

        More on Weekly ETF Brief

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