By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
The panel generally agrees that FDL and DHS, while showing strong performance in recent downturns, are not reliable defensive plays due to their sector concentration and regime-dependent upside. They may face significant pressure in different market conditions, such as a recession or credit crunch, and are vulnerable to ESG divestment risks and tax inefficiency.
Risk: Sector concentration and regime sensitivity, leading to potential underperformance in different market conditions.
Opportunity: None identified as a consensus opportunity.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
The First Trust Morningstar Dividend Leaders ETF trounced the market in 2022 with a positive return.
The WisdomTree U.S. High Dividend ETF crushed the indexes during the first-quarter correction.
Both ETFs are great diversifiers and hold up well when the broader market heads south.
When the markets are rising, you might feel like every decision is working out for you, but when they are falling, you want to make sure you have investments that will protect you on the downside. It's a key element of a diversified portfolio.
Often, investors think they have a diversified portfolio of small caps, large caps, growth, and value, but in reality, when the market tanks, most everything goes down to varying degrees.
Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »
That's why it's important to find stocks and exchange-traded funds (ETFs) that truly zig when the markets zag -- that is, they rise when all the other indexes are falling.
Here are two ETFs built to win when the broader market loses -- with a history of doing so during past market pullbacks. You may get sector funds or gimmick strategies that outperform in certain cycles, but these two are broad-market funds that have consistently generated positive returns in down markets.
The First Trust Morningstar Dividend Leaders ETF (NYSEMKT: FDL) has a history of not just outperforming during downturns but generating positive returns. In the 2022 bear market, when the S&P 500 (SNPINDEX: ^GSPC) fell 19%, FDL gained about 3% for the year. From the beginning of this year through March 30, when the S&P 500 fell 7.3% to its recent low and the Nasdaq Composite (NASDAQINDEX: ^IXIC) was down 10.5%, the First Trust Morningstar Dividend Leaders ETF was up about 15%. That's significant outperformance.
The ETF tracks the Morningstar Dividend Leaders Index, which uses a proprietary model to screen for stocks with a history of maintaining consistent, sustainable dividends. The roughly top 100 stocks ranked highest in the model are included in the portfolio, weighted by the dollar value of their dividend payments, with certain caps in place. Currently, it holds about 85 stocks.
Currently, the three largest holdings are ExxonMobil, Chevron, and Verizon.
At recent prices, the ETF is up about 15% year to date (YTD) and 25% over the past year on a total return basis, with dividends reinvested. Over the past five- and 10-year periods, it has averaged annualized total returns of 12.5% and 11%, respectively.
The WisdomTree U.S. High Dividend ETF (NYSEMKT: DHS) is another ETF that has consistently outperformed during corrections. In 2022, DHS returned about 4%, which beat the S&P 500 and Nasdaq by a wide margin. This year, through March 30, it was up about 7%, crushing the indexes.
Through May 27, the ETF has returned about 12% YTD and roughly 24% over the past 12 months. Over the past five- and 10-year periods, DHS has average annualized returns of 11% and 10%, respectively, on a total return basis.
This ETF is based on the proprietary WisdomTree U.S. High Dividend Index, which tracks the performance of companies with high dividend yields. The stocks are weighted in the portfolio by the proportionate share of the dividends each company is projected to pay in the coming year. Holdings are also subject to a composite risk score, which looks at value, quality, and momentum.
The three largest holdings in the ETF right now are Altria Group, Philip Morris, and AbbVie.
There are obviously ETFs that have performed much better than these two over the years, but the idea of owning these two is to smooth out the total returns in your portfolio when markets go south. There are also sector ETFs, particularly energy sector ETFs, that have performed very well during recent market downturns, but energy markets are cyclical and unpredictable.
Of these two, the First Trust Morningstar Dividend Leaders ETF has been the slightly better, more consistent performer. But both are excellent diversifiers.
Before you buy stock in First Trust Exchange-Traded Fund - First Trust Morningstar Dividend Leaders Index Fund, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and First Trust Exchange-Traded Fund - First Trust Morningstar Dividend Leaders Index Fund wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $471,072! Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,303,352!
Now, it’s worth noting Stock Advisor’s total average return is 983% — a market-crushing outperformance compared to 210% for the S&P 500. Don't miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
**Stock Advisor returns as of May 29, 2026. *
Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie and Chevron. The Motley Fool recommends Philip Morris International and Verizon Communications. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"Past outperformance in two specific downturns does not prove these dividend ETFs will reliably protect portfolios when energy and tobacco face new macro or regulatory shocks."
The article spotlights FDL and DHS for positive returns in 2022 (+3% and +4%) and through March 2023 (+15% and +7%) while the S&P 500 fell 19% and 7.3%. Both ETFs concentrate in energy (Exxon, Chevron) and high-yield defensives (Altria, Verizon), delivering 11-12.5% annualized five-year returns. This setup worked in rate-driven corrections but ignores how energy cyclicality and potential dividend pressure from slowing global demand could erode the edge after May 2023. Sector ETFs are dismissed as unpredictable, yet these two carry similar concentration risks.
If inflation moderates faster than expected and growth stocks rebound sharply into 2024, these value-tilted ETFs could lag the S&P 500 by double digits, reversing the recent outperformance cited.
"FDL and DHS outperformed during 2022-2023 primarily due to energy/tobacco sector tailwinds, not inherent defensiveness, and their long-term returns don't justify the 'diversifier' narrative."
The article conflates two separate phenomena: dividend stocks' outperformance during *specific* downturns (2022, Q1 2023) with a reliable defensive characteristic. But this is survivorship bias dressed as strategy. FDL and DHS both have massive energy and tobacco exposure—sectors that rallied hard in 2022-2023 due to inflation and geopolitical shocks, not dividend quality. The article never addresses what happens when energy and tobacco underperform, or when rate cuts make high-yield stocks less attractive relative to growth. The 10-year returns (11-12% annualized) barely beat the S&P 500's long-term average, yet the article implies these are superior diversifiers. They're not—they're sector bets masquerading as defensive plays.
If inflation remains sticky and the Fed stays restrictive longer, high-dividend stocks could genuinely outperform for years, and the article's historical performance becomes predictive rather than coincidental. The dividend-weighting methodology also does screen for quality, not just yield-chasing.
"These ETFs are not 'all-weather' diversifiers but rather tactical bets on the energy and value sectors that will likely underperform during a broad-based liquidity crunch."
The article frames FDL and DHS as 'crash-proof' diversifiers, but this is a classic case of performance chasing based on a specific macro regime—the 2022 energy-led bear market. By overweighting Exxon, Chevron, and tobacco stocks (Altria, Philip Morris), these ETFs are essentially 'Value/Defensive' factor plays. They aren't 'zigging' because of some magical diversification property; they are zigging because they lack the high-multiple tech exposure that gets crushed when interest rates rise. If the next market pullback is driven by a systemic credit event or a deflationary shock rather than a valuation reset in growth stocks, these dividend-heavy portfolios could face significant pressure alongside the broader market.
If we are entering a long-term 'higher-for-longer' interest rate environment, the valuation compression in growth will continue, making these dividend-yielders the only viable place to hide for total return.
"Dividend-focused, sector-concentrated ETFs are not reliable hedges in a sustained downturn or rising-rate regime; their performance is episodic and regime-dependent."
The piece promotes FDL and DHS as durable downhill diversifiers, but their upside is regime-dependent and not a guaranteed hedge. Their drawdown protection relies on dividend defensiveness and sector bets (FDL leans energy/telecom; DHS tilts high-yield names), which can reverse quickly in a rising-rate, growth-rotation environment. In a recession with dividend cuts or an extending inflationary period, yields can compress or payouts shrink, hurting price performance. The article also omits max drawdown figures, liquidity nuances, tax implications, and how these funds perform when credit conditions tighten. Past quarterly outperformance isn’t a reliable predictor of future downside resilience.
Counterpoint: if inflation cools and rate expectations ease, these dividend stocks can re-rate and actually outperform, especially if energy/telecom stabilize; the downside hedge claim may be overstated.
"ESG-driven outflows pose an unmentioned structural liquidity risk to these concentrated holdings."
Claude rightly notes sector concentration but misses the forward ESG divestment risk: sustained outflows from energy and tobacco holdings could compress valuations and liquidity in FDL/DHS far more than broad indexes, especially as pension and ESG mandates accelerate post-2024. This structural headwind turns their recent outperformance into a potential trap rather than repeatable defense.
"ESG headwinds are real but secondary to the immediate risk: these funds only work if net dividend yield exceeds risk-free rates, a threshold the article never tests."
Grok's ESG divestment thesis is speculative—pension allocations to energy actually stabilized post-2022 as fiduciaries prioritized returns over mandates. More pressing: neither FDL nor DHS discloses realized dividend yields post-expense ratios. If net yields fall below 3.5% while Treasury yields hold 4.5%+, the total-return case collapses regardless of sector rotation. The article never quantifies this breakeven, which is the real vulnerability.
"The tax inefficiency of dividend-weighted ETFs creates a hidden drag that likely negates their 'defensive' outperformance when compared to tax-advantaged fixed income."
Claude is right about the yield-to-Treasury gap, but both he and Grok ignore the tax drag. These ETFs are dividend-weighted, meaning they force taxable distributions regardless of investor intent. In a high-rate environment, the after-tax total return of FDL or DHS likely underperforms a simple ladder of short-term Treasuries or tax-efficient index funds. The article’s failure to mention tax-inefficiency makes these funds look like 'defensive' winners while they silently bleed capital to the IRS.
"DHS/FDL's regime-sensitive exposure creates a bigger, underappreciated risk than tax drag: in downturns, payouts fall and spreads widen, undermining total return."
Gemini raises a valid point about tax drag, but the bigger risk is regime sensitivity: DHS/FDL's energy/credit exposure makes them vulnerable in a recession or credit crunch, where dividends can be cut and spreads widen even as yields look attractive. Tax drag matters, yet liquidity constraints and potential payout cuts could erase alpha much faster than after-tax gains from a rising-rate environment.
The panel generally agrees that FDL and DHS, while showing strong performance in recent downturns, are not reliable defensive plays due to their sector concentration and regime-dependent upside. They may face significant pressure in different market conditions, such as a recession or credit crunch, and are vulnerable to ESG divestment risks and tax inefficiency.
None identified as a consensus opportunity.
Sector concentration and regime sensitivity, leading to potential underperformance in different market conditions.