2023-08-24 07:14:36 ET
Summary
- Invesco's S&P 500 High Dividend Low Volatility ETF underperforms compared to similar funds and market benchmarks.
- The fund's emphasis on low volatility seems ineffective, as its price movements closely follow other indexes during market downturns.
- SPHD's sector allocation in utilities and consumer staples limits its growth potential, and its dividend growth rate remains negative.
I've always enjoyed getting paid from my investments. It's the literal definition of making your money earn money. Undoubtedly, companies that provide dividends are among the top choices for passive income. Long-term dividend investors who contribute consistently over decades are likely to witness their dividend income transforming into a significant hourly wage equivalent that has the power to pay your bills.
Some people get nervous about being their own portfolio manager which leads them to ETFs. Exchange traded funds like Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) and the monthly dividend payment seem appealing at first glance but let's dig into this fund's poor performance and why you're better off somewhere else.
Overview
SPHD is an ETF centered around the S&P 500 index, with an emphasis on shares that exhibit both high dividends and low volatility. The Fund is designed to allocate a minimum of 90% of its overall assets to common stocks that make up the S&P. These picked securities have followed a historical criteria of offering substantial dividend yields while maintaining a low level of volatility. SPHD undergoes a semi-annual process of rebalancing where they make the necessary additions or removal of holdings, specifically occurring in the months of January and July.
It's a shame that a fund like this severely underperforms the market as a whole. SPHD has poor performance compared to its counter-parts such as Schwab's Dividend ETF ( SCHD ), Vanguard's High Dividend ETF ( VYM ), and especially the S&P ( SPY ). Something else to mention, is this really low volatility? Looking at the total return graph, we can see the overall price movement follows the other indexes pretty closely through all the dips. So where exactly is the low volatility part of the fund? This is the main reason I rate this as a "Strong Sell". Your money is better off elsewhere.
Low Volatility At The Cost Of Low Performance
SPHD doesn't boast the same level of diversification as some counterparts that emphasize higher dividend yields. The fund currently holds investments in 51 different companies . We can see that the majority sector is utilities. Utility companies are known to be one of the least volatile sectors that also embraces the concept of rewarding shareholders through dividend payments. This may have been a good strategy when the Fed cut interest rates to stimulate the economy, but in this high interest rate environment, utilities aren't exactly the most popular place for investors to throw their cash. In the current high interest rate environment, investors prefer to put their cash in higher yielding assets.
Likewise, only 2.18% of the fund's assets are allocated to technology stocks. This means you are missing out on some huge upside potential as well as most of the run-up the Nasdaq experienced this year. Being that SPHD aims for reduced volatility, the remaining majority of their investment portfolio are in consumer staples. Consumer staples tend to exhibit lower growth and reduced volatility during economic downturns since these are companies with products that people buy regardless of market conditions. This strategic allocation ensures that the Invesco fund aligns with its goal of maintaining low volatility but as you can see, it limits the upside movements.
We can see that even Invesco's own fact sheet admits lackluster performance on a hypothetical growth of $10,000 over a 10 year period. Here we can see further reinforcement that investors are better off investing in a fund without the criteria of low volatility. I understand the risk tolerance is different for everyone and I do see a case for an ETF like this with older investors looking to obtain income rather than growth, but from these findings SPHD is not for the average investor.
Higher Yield - REIT Exposure
In order to achieve a higher yield, SPHD allocates 16% of its assets into real estate investment trusts (REITS). Notable REITs found in the portfolio include Simon Property Group ( SPG ), VICI Properties ( VICI ), and Realty Income ( O ), which all three yields an average of 5.8% combined. Coincidentally, all of these REITs have fell considerably in price this year which further contributes to SPHD's lack of performance on the upside.
Since SPHD includes REITs, the classification of the dividend payments are non-qualified. This means the dividends do not receive the same favorable tax treatment as qualified dividends. This isn't a bad thing but rather something that investors should be aware of being throwing an excess amount of cash into SPHD. These tax ramifications can be totally avoided if you were to instead invest your money into another dividend based fund that does not have REITs as part of their portfolio, such as Schwab's Dividend ETF ( SCHD ).
The Monthly Dividend
SPHD pays a dividend distribution out to shareholders on a monthly basis. Seeking Alpha's dividend scorecard gives SPHD a B rating. I think this is a fair assessment since the yield is admittedly higher than a lot of similar dividend based ETFs on the market. The dividend growth rate though has been very sub-par with the 3 year dividend growth rate being negative at -1.22%.
In this environment, if you are looking for true low volatility with a dividend that matches that of SPHD, you are honestly better off putting money into a two year treasury. Then, in two years you reanalyze the market to see where to take it from there. Normally, this isn't something I would so freely suggest because of the potential upside in price appreciation that ETFs can capture. In the case of SPHD though, the portfolio makeup is currently not in a position to thrive. The makeup of SPHD really is built around investors that are okay with sacrificing growth in exchange for income.
Conclusion
Invesco S&P 500 High Dividend Low Volatility ETF ( SPHD ) revolves around the concept of delivering both high dividends and low volatility. However, its performance falls short when compared to market benchmarks and similar ETFs.
Over the past decade, SPHD underperforms funds like Schwab's Dividend ETF ( SCHD ), Vanguard's High Dividend ETF ( VYM ), and the S&P 500 ( SPY ). The promise of low volatility seems pointless, as its price movements closely mirror other indexes during market downturns. The fund's sector allocation emphasizes utilities and consumer staples, limiting growth potential.
Even with a monthly dividend distribution, SPHD's dividend growth rate remains negative. Given its lackluster performance and questionable alignment with low volatility goals, investors seeking stability and growth might find more favorable alternatives elsewhere.
For further details see:
SPHD: Poor Performance Overshadows Monthly Pay