2023-06-22 04:35:48 ET
Summary
- SPHD focuses on high dividend, low volatility stocks.
- The ETF's strategy leads to concentrated portfolios with high turnover rates, making it a risky and expensive investment.
- SPHD has underperformed the S&P 500 and most other large dividend ETFs, for most relevant time frames.
Author's note: This article was released to CEF/ETF Income Laboratory members on June 16th.
I last wrote about the Invesco S&P 500 High Dividend Low Volatility Portfolio ETF ( SPHD ) close to two years ago. In that article, I argued that SPHD's strategy led to needlessly concentrated portfolios with high turnover rates, a risky, expensive state of affairs. Since then, SPHD has underperformed the S&P 500 and most other large dividend ETFs, broadly in-line with expectations. SPHD ETF remains a risky, subpar investment opportunity, so I see no reason to invest in the fund.
SPHD Basics
- Sponsor: Invesco
- Underlying Index: S&P 500 Low Volatility High Dividend Index
- Expense Ratio: 0.30%
- Dividend Yield: 4.25%
- Total Returns CAGR (5Y): 8.17%
SPHD Overview and Analysis
SPHD is an index ETF tracking the S&P 500 Low Volatility High Dividend Index . Said index first selects the 75 highest-yielding S&P 500 stocks and, from these, the 50 stocks with the lowest realized volatility during the past eight months. These 50 stocks are then included in the index, subject to a basic set of inclusion and exclusion criteria, centered on liquidity, size, and the like.
SPHD is a reasonably well-diversified fund, with exposure to most relevant industry segments, and with investments in fifty companies. Diversification is lower than that of most equity indexes and dividend equity indexes, most of which invest in hundreds of securities. The S&P 500 includes, well, 500 companies, 10x that of SPHD.
Industry exposures are as follows.
SPHD, as most other dividend and value ETFs, is overweight old-economy industries like real estate and utilities, as these tend to sport above-average dividend yields. On the flipside, the fund is underweight tech, as tech companies rarely pay sizable dividends. Quick table of SPHD's industry exposures versus those of the S&P 500.
Due to the above, SPHD tends to outperform when old-economy outperforms and tech underperforms, as was (mostly) the case in 2022.
Data by YCharts
As SPHD focuses on low volatility stocks, the fund should outperform when stocks are down too. One can see that happening in 2022 as well, as the fund clearly outperformed even after accounting for differing industry exposures. Tech underperformed by 9%, which explains some of the S&P 500's 18% underperformance, but obviously not all.
On the flipside, the fund tends to underperform when old-economy industries underperform, and when tech outperforms, as has (mostly) been the case YTD.
SPHD focuses on stocks with above-average dividends, resulting in an above-average 4.3% yield for the fund. It is a reasonably good yield on an absolute basis, and moderately higher than that of the S&P 500 and most large dividend ETFs.
SPHD's dividend growth track-record is reasonably strong too, with fund dividends generally growing at high single-digit rates. Growth was spotty from 2020 to 2022, due to the pandemic. Normal ETF dividend volatility might have played a part as well. Still, the fund's dividend growth track-record is quite strong, although not out of the ordinary for a dividend equity ETF.
SPHD's yield on cost looks markedly worse than above, as the fund's dividends have been somewhat stagnant for the last couple of years. Yield on costs only really grew after the 6Y mark, a mediocre result.
In general terms, SPHD does provide investors with some benefits, and does have a (possible) investment thesis. Specifically, the fund's above-average 4.3% yield and low-volatility holdings are both important benefits for investors, especially for more risk-averse equity income investors and retirees. There are, however, two negative issues with the fund.
First, is the fact that the fund's benefits and overall value proposition are quite weak. SPHD'S 4.3% yield is good, but not great, and only slightly higher than that of several well-known equity dividend ETFs.
SPHD's dividend growth track-record is also good, but not great, and a bit weaker than that of its peers. For long-term investors, other equity dividend ETFs offer higher long-term dividends. As an example, the Schwab U.S. Dividend Equity ETF's ( SCHD ) yield on cost is higher than that of SPHD after the 3Y mark. For long-term dividend investors, SCHD was clearly the stronger choice in the past, and should be the better choice in the future.
The Vanguard High Dividend Yield ETF ( VYM ) starts to (roughly) match SPHD's yield on cost at the 3Y mark, exceed it after 6Y.
SPHD's low volatility holdings did outperform in 2022, the most recent bear mark, but so did most, but not all, dividend ETFs.
Data by YCharts
SPHD's low volatility holdings underperformed in 2020, however.
Data by YCharts
SPHD does provide investors with some benefits, but these do not seem significant enough, or consistent enough, to make the fund a buy.
Second negative issue with the fund is the fact that its strategy sometimes backfires during downturns, due to high turnover rates and sluggish recovery.
Let's go through what the above means, in practice.
SPHD invests in the 50 least volatile S&P 500 stocks (subject to several constraints). Even the least volatile stocks will sometimes suffer losses, underperform, and behave erratically. When this happens, they will no longer be the least volatile stocks, so they will be removed from the index and replaced by more stable, better-performing stocks. Losses tend to be temporary and recoveries swift, but there are no recoveries if you sell after a loss, and the fund sometimes sells after a loss. I am somewhat conflating losses with volatility here, as although these are technically two different metrics, they are very correlated. Just compare S&P 500 prices with index volatility.
Data by YCharts
Although the issue above is somewhat theoretical, I do find it to result in real, practical issues for SPHD. As an example, and as explained in my previous article , the fund sold several of its largest investments at rock-bottom prices in 2020. In late 2019, the fund was heavily invested in Kimco Realty ( KIM ), Ford ( F ), and ONEOK ( OKE ). amongst others. These stocks significantly underperformed from late 2019 to early 2020, due to the pandemic.
Data by YCharts
These underperforming stocks were soon removed from the index and the fund because of its methodology. Remember, SPHD's underlying index only includes low-volatility stocks, and as should be clear from the above, these stocks simply don't qualify. Removing these stocks from the index was undoubtedly the wrong decision, as they would recover most of their losses later in the year.
Data by YCharts
SPHD's investors suffered significant losses during early 2020, but received none of the gains during the recovery, at least for these three stocks. These issues explain the fund's significant underperformance during that year.
From what I've seen, the fund's strategy worked somewhat better in 2022, likely due to the fact that volatility was lower in that year / bear market. I did see the fund selling off / underweighting energy sometime during the year, even though energy significantly outperformed during the same.
Conclusion
SPHD's overall value proposition is quite weak, with few significant benefits or advantages relative to peers. At the same time, the fund's strategy has an important weakness, which sometimes causes significant losses and underperformance. As such, I see no reason to invest in the fund.
For further details see:
SPHD Remains A Subpar Investment Opportunity