Lower Risk, Higher Dividends With This ETF

Dividend stocks often display favorable volatility characteristics relative to non-dividend payers, but some exchange traded funds expand on that concept. That group includes the Invesco S&P 500 High Dividend Low Volatility ETF SPHD.

SPHD's underlying index is comprised of the 50 highest-yielding S&P 500 stocks with the lowest trailing 12-month volatility.

What Happened

Year-to-date, SPHD is doing its job in terms of reducing volatility. The fund's annualized volatility as of the end of November is 12.3 percent compared to 15.5 percent on the S&P 500. Including paid dividends, SPHD is up 1.4 percent year-to-date compared to 4.6 percent for the S&P 500.

“The fund prioritizes dividend yield over low volatility,” said Morningstar in a recent note. “It starts with the 75 highest-yielding stocks in the S&P 500. To limit risk, the fund ranks all stocks that pass its initial screen on their volatility over the past year and removes the most volatile 25. Volatility isn't a perfect measure of risk, but less-volatile stocks tend to have more-stable cash flows than their more-volatile counterparts and generally hold up better during market downturns.”

Why It's Important

Low volatility strategies aren't designed for 100 percent upside capture. Rather, funds such as SPHD are designed to perform less poorly when equity markets decline. Still, over the past three years, SPHD has modestly outperformed the S&P 500 while being 120 basis points less volatile.

When considering the Federal Reserve has raised interest rates eight times over the past three years, SPHD's outperformance of the S&P 500 is all the more impressive because the ETF has usually been heavily allocated to rate-sensitive sectors. The fund allocates 38.52 percent of its combined weight to the utilities and real estate sectors.

“The fund exhibited low sensitivity to market fluctuations (market beta of 0.66) from November 2012 through October 2018,” according to Morningstar. “This suggests that the fund had considerable exposure to risk that is not highly correlated with the market. During that time, the fund outpaced the Russell 1000 Value Index by 71 basis points annualized. This was largely due to more-favorable exposure to consumer defensive stocks.”

What's Next

Low volatility strategies have recently been in style and rewarding investors. Over the past 90 days, SPHD is up 0.4 percent while the S&P 500 ha been drubbed. If the consumer discretionary and technology sectors rebound, SPHD could be vulnerable to disappointment because the fund devotes just 8.85 percent of its combined weight to those sectors.

Morningstar has a Bronze rating on SPHD.

Disclosure: The author owns shares of SPHD.

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