Why This Dividend ETF Can Work In A Variety Of Climates

The phrase “all weather” is perhaps overused in the world of finance, but there are some strategies that consistently perform well when markets rise and perform less poorly when equities swoon. The SPDR S&P Dividend ETF SDY is one of those products.

What Happened

As was recently noted here, SDY tracks the S&P High Yield Dividend Aristocrats Index, a benchmark that requires member firms to have minimum dividend increase streaks of 20 years, and that index has a lengthy track record of topping the S&P Composite 1500 Index. Of course, dividends played a major role in that out-performance.

“From Dec. 31, 1999, to June 30, 2019, the S&P High Yield Dividend Aristocrats generated a total return of 590.3%,” said S&P Dow Jones Indices in a recent note. “Of the contribution, about 57% was from dividend income, while 43% came from price appreciation.”

Why It's Important

On an annualized basis, SDY's index topped the S&P Composite 1500 by an average of 4.3% and while much of that, as noted above, was attributable to dividends, a good portion of that out-performance was also linked to reduced volatility.

“The reduced volatility helped the strategy deliver a much better risk-adjusted return (0.75) than the S&P Composite 1500 (0.41). Furthermore, the S&P High Yield Dividend Aristocrats also had superior risk-adjusted returns over the 5-, 10-, and 15-year periods,” according to S&P Dow Jones.

What's Next

SDY's index has, not surprisingly, shown strong defensive traits, though the fund is not necessarily boring. Currently, SDY allocates over a third of its weight to economically-sensitive industrial and financial services stocks. Defensive traits are realized with more than a quarter of the fund's roster devoted to consumer staples and utilities names.

While SDY does have ample cyclical beyond its industrial weight -- 17% combined to consumer discretionary and materials stocks -- data confirm the fund's defensive posture.

“The S&P High Yield Dividend Aristocrats demonstrated defensive features during the down markets of the studied period, with the strategy having a smaller maximum drawdown, less loss, and a lower beta than the S&P Composite 1500,” according to S&P Dow Jones.

Over the past three years, SDY's largest drawdown was 14.2%, or 510 basis points below that of the S&P 500.

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