Use This High Dividend Low Vol ETF For An Equity Pullback

My readers know that I am a big fan of low volatility strategies. They may not always capture 100% of a raging bull market, but they also avoid drastic losses when equity markets swoon. In the long-run, you may be surprised that many low vol strategies have similar if not better returns than their respective traditional strategies, but with much less volatility. The secret is in avoiding losses.

Think about this, if your portfolio loses 10% in any given period, it needs to generate 11% to get back to breakeven. While if your portfolio only declines 5%, it only needs to recover 5.26% to get back to breakeven. In other words, avoid big losses and you don’t need big returns to generate a profit.

With markets beginning to show some liveliness, we believe it’s a good time to start thinking about how to protect against a major market decline. One such way is the Invesco S&P Low Vol ETF (SPLV) which invests in the 100 least volatile stocks in the S&P 500 over the previous year and rebalanced quarterly. But SPLV only pays a 2% dividend.

On the other hand, the Invesco S&P 500 High Dividend Low Volatility Portfolio ETF (SPHD) pays a 4% dividend yield and exhibits lower volatility than the S&P 500 as well.

Invesco S&P 500 High Dividend Low Volatility Portfolio ETF

SPHD tracks the performance of the S&P 500 Low Volatility High Dividend Index, which measures the performance of the 50 least volatile high yielding stocks in the S&P 500.

All stocks in the selection universe (S&P 500) are ranked by dividend yield from highest to lowest. The Top 75 stocks are selected with a maximum of 10 stocks per GICS sector. The standard deviation of each stock is measured over the previous 252 trading days and they are ranked in ascending order such that the stock with the lowest volatility is ranked 1 and the stock with the highest volatility is ranked 75. Only the top 50 stocks are added to the index. The index is then weighted by each company’s float-adjusted market capitalization – so SPHD, like the underlying index, will still have a higher weighting towards the larger market cap stock. SPHD simply mimics that index.

Source: Invesco Website

Performance

SPHD has had solid performance over the last 5 years, slightly underperforming the S&P 500 but outperforming the Large Cap Value category average. Over the last year, SPHD has generated a 6.34% return as well as a 6.2% annualized return over the last 3 years and 10.4% annualized over the last 5 years. The S&P 500, by contrast, has generated a total return of 11% annualized over the last 5 years.

Source: Author Calculations, Invesco Website 

Where the ETF makes up for the slight underperformance is in the lower risk taken over the period. The standard deviation of SPHD is lower than the S&P 500 in all periods in which both have data. Notice the Sharpe Ratio of 0.96 over a 5-year period on SPHD compared to 0.93 for the S&P. As we will note later, this Sharpe ratio is also superior to other high dividend ETFs as well.

The maximum drawdown is also noticeable. Over the last 5 years, the maximum drawdown for SPHD was 12.5% compared to 19.4% for the S&P 500. To use the previous example, the S&P 500 would need a return of over 23% to make up for the max drawdown, whereas SPHD would need just 14% to recover.Source: Author Calculations, Invesco Website

Top Holdings

The top holdings of the ETF are actually quite interesting, because quite a few of them are also part of one of our portfolios or have been at some point in time.

Those currently or recently in our portfolios include Ford Motor (F), Kimco Realty (KIM), AT&T (T), Invesco (IVZ), Oneok (OKE), Iron Mountain (IRM), Weyerhaeuser (WY), Ventas (VTR), IBM (IBM), and HCP (HCP).Mere coincidence.

Source: Invesco Website

Exposures

It’s no surprise that the largest exposure is to large caps and specifically to large cap value – where over 50% of the fund’s assets are invested. There is some mid cap exposure and most of that is also in the Value bucket.

We also see that the sector with the highest exposure is Consumer Defensive with a 22% allocation, followed by Utilities – both of which are defensive sectors.

Source: Author Calculations, Invesco Website

Comparison to Peers

SPHD also holds up well against other dividend-focused funds. The following funds aren’t perfect substitutes for SPHD but all have some comparable characteristics which we thought were worthwhile to compare to.

The largest of the comparable funds is the Vanguard Dividend Appreciation ETF (VIG) with over $45 billion in AUM compared to just $3.3 billion for SPHD. The expense ratios range from 6bps for the Vanguard funds and up to 2.42% for the highly specialized Invesco KBW High Dividend Yield Financials ETF (KBWD)

Our focus fund, however, has the highest dividend yield among the group and also has reasonable turnover of 46%. All have fund had positive fund flows over the last three months – an indication of investors looking for defensive income strategies.

Only the Vanguard Dividend Appreciation ETF outperformed the S&P 500 over a 5 year period but as we mentioned earlier, SPHD was within striking distance with less volatility.

Source: Author Calculations, Invesco Website  

Risk Analysis

The risk of SPHD is what really stands out to me – or rather, the lack of risk – compared to some of the other ETFs and the benchmark S&P 500.

While the 5-year return was below that of the index and VIG, the lower standard deviation resulted in a Sharpe Ratio above all other funds and the S&P 500 as well. For those that need a refresher, the Sharpe Ratio measures the amount of return for a given unit of risk – where risk in this case is measured by the standard deviation of returns.

An investor who simply wants to reduce risk at all costs, would likely prefer the iShares Core High Dividend ETF (HDV) with a standard deviation of just 10.17%, but it also had the lowest return over the previous 5-year period of just 8.42% – resulting in an inferior Sharpe ratio.

Source: Author Calculations

We also point out the superior Alpha (higher is better), Beta (lower is better for defensive positioning), and the Up/Down Capture (higher is better)

A higher Alpha indicates that the fund is providing higher returns for the level of risk it is taking – when compared to the benchmark. Meanwhile, Beta measures the sensitivity of the ETF to movements in the benchmark, and Up/Down Capture is a ratio of upside capture divided by downside capture. A Up/Down Capture above one indicates that the ETF has historically captured a higher proportion of the benchmark returns when the benchmark is positive than the proportion of downside returns it has captured when the benchmark has declined.

My Take

Markets are becoming more volatile despite setting new highs. With economic data coming in mixed, the pullback in the markets – which usually lead an economic downturn – could be abrupt. No one seems to be expecting it and that is usually when the risk is highest.

I also realize that watching the market set new highs from the sidelines is also painful so I believe that SPHD is a reasonable compromise for some of our members’ large cap exposure. Rather than stay invested in the S&P 500 or some other broad market index ETF – it might be a good idea to allocate some of that capital to the Invesco S&P 500 High Dividend Low Volatility ETF. It pays monthly dividends so we are including it in our Stable Monthly Income Portfolio. 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is meant to identify an idea for further research and analysis and should not be taken as a recommendation to invest. It does not provide individualized advice or recommendations for any specific reader. Also note that we may not cover all relevant risks related to the ideas presented in this article. Readers should conduct their own due diligence and carefully consider their own investment objectives, risk tolerance, time horizon, tax situation, liquidity needs, and concentration levels, or contact their advisor to determine if any ideas presented here are appropriate for their unique circumstances. Furthermore, none of the ideas presented here are necessarily related to NFG Wealth Advisors or any portfolio managed by NFG.