A few times before, I made my case for dividend-paying stocks. They have proven to produce better returns than the broad market in the past, when a long-enough time horizon is considered. This has been particularly true of dividend aristocrats over multi-year periods.
But even though dividend payers are often associated with safety and conservatism, one would not know it by looking at how the Invesco S&P 500 High Dividend Low Volatility Portfolio ETF (SPHD) has been doing lately. This fund has underperformed a number of benchmarks during a turbulent year by quite a bit, despite it having “dividend” and “low volatility” displayed on its name.
Not very storm-resistant
Below is a graph that illustrates what I am referring to. Notice that SPHD, in blue, has dropped about 26% over the past three months (a bit less than this, once dividend payments are accounted for). Peak to trough, SPHD had lost a staggering 41% by March 23.
At the same time, two ETFs that seek low volatility and high dividend payments independently, Invesco S&P 500 Low Volatility ETF (SPLV) and Vanguard High Dividend Yield (VYM), respectively, have kept up with the S&P 500 and dropped only about 17% since late January (again, dividends not considered for simplicity).
To understand what may be behind SPHD’s underperformance when some would have expected the fund to do better than average, one must look under the hood. The Invesco S&P 500 High Dividend Low Volatility Portfolio ETF tracks a benchmark that seeks to invest in “the 50 least-volatile high dividend-yielding stocks in the S&P 500.” The benchmark manager goes on to clarify that “the index is designed for income-seeking investors in the U.S. equity market.”
Source: Yahoo Finance
What this means in practice is that SPHD ends up placing nearly 75% of its capital in five sectors, three of which are highly pro-cyclical and have been hurting more than market average in the past 10 weeks: real estate (17.9% allocation), financial services (13.4% allocation) and, especially, energy (10.6% allocation). While these three industries combined account for more than 40% of SPHD’s holdings, they make up only about 20% of the S&P 500 (SPY) – see below. Also interestingly, only one out of SPHD’s top five stocks has been outperforming broad equities over the past three months.
SPHD also seems to be hurting from its bias towards value (94.8% allocation spread across large, mid and small cap), a byproduct of it favoring high-yielding stocks. I have discussed recently how the value factor seems to be dying a slow death, as it fails to outperform during bullish and bearish periods. Both growth and downside protection now seem to be largely concentrated within a few Big Tech names, which in turn continue to benefit from (1) the right industry trends during good times and (2) cash-rich balance sheets during bad times.
Worth noting, less than 11% of SPHD’s capital is allocated to the tech and communication services sectors, compared to the S&P 500’s 33.6%.
Is it a bad ETF to own?
The question of whether holding on to SPHD makes sense deserves a nuanced answer. From a portfolio growth perspective, I have serious doubts that the ETF will produce market-beating returns, especially during these troubled times. The ETF owns quite a bit of stocks that would likely only perform well in the early innings of an economic expansion. We currently seem to be ways away from this bullish stage of the cycle, considering a global economy that has yet to fully reopen and unemployment in the US that continues to climb dramatically by the week.
But then again, SPHD is meant to serve a particular group of investors: those concerned with producing regular income (e.g. retirees). That being the case, the ETF’s current SEC 30-day dividend yield of 6% looks very enticing, especially considering the current rock-bottom interest rate environment.
Still, I would caution dividend investors about leaning too heavily on SPHD. A wave of dividend cuts, especially within the real estate and energy sectors, may have already started. Also, the fund seems most vulnerable today to further declines in market value, absent a definitive improvement in the macroeconomic landscape. From a total return perspective, I believe that better ETF options may be found elsewhere.
I use an approach that favors predictability of financial results and broad diversification when choosing stocks for my All-Equities Storm-Resistant Growth portfolio. So far, the small $229/year investment to become a member of the SRG community has lavishly paid off, as the chart below suggests. I invite you to click here and take advantage of the 14-day free trial today.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.