A Winning Dividend ETF For Market Tumult

The third quarter was one to forget for U.S. stocks as the S&P 500 slumped 7.2 percent amid a spike in global equity market volatility. However, that increased volatility reminded investors that, at the very least, exchange traded funds dedicated to the low volatility are usually less bad than traditional broad market ETFs when volatility jumps.

That was the case last quarter as the PowerShares S&P 500 Low Volatility Portfolio SPLV lost just 2.8 percent. Obviously, SPLV's third-quarter showing was nothing to write home about, but it reaffirmed the utility of the low volatility during times of market tumult.

Adding the dividend factor to low volatility proved even more efficacious in the third quarter.

“Despite largely negative returns, there was tremendous factor dispersion in the third quarter, with a spread of nearly 15% between the best performing factors – dividend and low volatility, and the worst-performing factor – high beta. Although research has shown that many factors have historically outperformed the broad market across market cycles, the third quarter demonstrated that factors are not immune from short-term volatility,” according to a new research note from Invesco PowerShares, the fourth-largest U.S. ETF sponsor.

With that in mind, perhaps it is not surprising that the PowerShares S&P 500 High Dividend Low Volatility Portfolio SPHD lost just 0.4 percent last quarter. SPHD tracks the S&P 500 Low Volatility High Dividend Index, which means the fund's holdings are comprised of high-yields stocks that are also low beta names.

SPHD allocates nearly a quarter of its weight to the utilities sector, the ETF's largest sector weight, so it is not unreasonable to say the fund benefited from the Federal Reserve declining to raise interest rates last month. However, SPHD is covered in case rates rise with almost 30 percent combined exposure to cyclical financial services and industrial stocks. Importantly, SPHD did its job when investors really needed it to do just that.

“This multi-factor strategy, as defined by the S&P 500 Low Volatility High Dividend Index, generated a positive return of 0.36%, besting the S&P 500 Index by 6.80%,” adds PowerShares.

SPHD, which has a trailing 12-month dividend yield of almost 3.5 percent, pays a monthly dividend. That is an important trait for older investors looking for a steady income stream and for young investors looking to more fully exploit the advantages of compounding.

Year-to-date, investors have added $243.3 million of SPHD's $506.8 million in assets to the fund, according to PowerShares data.

Disclosure: The author owns shares of SPHD in a retirement account.