Why This Dividend ETF Consistently Works

The SPDR S&P Dividend ETF SDY has been getting some press lately and one reason for that is the fund's impressive mandate of only holding stocks that have boosted payouts for 20 consecutive years.

Well, that's the mandate of SDY's index, the S&P High Yield Dividend Aristocrats, but you get the picture.

What Happened

Another reason for SDY's recent batch of acclaim is the ETF's durability across multiple market settings. Of course, that's a nice trait, but knowing why SDY has that durability is important, too.

“The S&P High Yield Dividend Aristocrats has diversified sector exposures, with some sector bets, given different dividend-paying practices among sectors,” said S&P Dow Jones Indices in a recent note. “Historically, the S&P High Yield Dividend Aristocrats has had higher exposure to the Financials, Utilities, Consumer Staples, Industrials, and Materials sectors, in terms of absolute weight and weights relative to the S&P Composite 1500.”

Those five sectors combine for about two-thirds of SDY's roster.

Why It's Important

SDY's large combined weight to those sectors is important because although the fund isn't a high-yield play, it does source some yield from the utilities exposure. Additionally, the consumer staples, financial services and industrial sectors are reliable when it comes to dividend growth.

However, historical data confirm SDY's long-term returns are more attributable to stock selection over sector selection.

“Performance attribution shows that individual stock selection contributed to 75% of monthly active returns, while sector allocation contributed to 25%. Thus, the outperformance of the S&P High Yield Dividend Aristocrats mainly came from stock selection rather than sector allocation,” according to S&P Dow Jones.

What's Next

Investors evaluating SDY should also consider what factors drive the fund's performance. Not surprisingly, growth and momentum aren't really in the equation and that's alright.

“We can see that the S&P High Yield Dividend Aristocrats constituents had positive exposures to lower beta, better value, higher operating profitability, and more conservative investment growth. Profitability and investment growth are considered to be quality factors,” according to S&P Dow Jones.

In fact, the data indicate SDY's index had better quality and value traits than the S&P 1500 Composite.

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