The iSectors ETF spotlight series continues with a look at the PowerShares S&P 500 High Dividend Low Volatility ETF (SPHD). Last month, we wrote about the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and compared it with one of our current holdings, the SPDR S&P Dividend ETF (SDY). NOBL vs. SDY was unique because we were adding a fund that almost directly compared to one we currently own.
With this fund, SPHD, there really wasn’t a comparison we could make with a fund that we had previously owned. Most of our funds have traditionally been single factor types of funds; we hadn’t really dipped our toes fully into the multi-factor/smart beta water. To make room for this fund in our portfolio, we had to alter our large-cap dividend weightings. We ended up equal weighting the handful of large-cap dividend funds included in the portfolio because it was hard to justify certain funds being weighted differently than others.
The case for buying SPHD was very compelling. Before even considering the methodology or construction of the fund, we looked at the performance. Both the short-term and the long-term returns for SPHD are stellar. SPHD also lives up to its name as a high dividend, low volatility fund by keeping the standard deviation low even while delivering the juiced up returns. Even the 12 month dividend yield sits respectably at 3.41%, as of 6/29/2016 (via Morningstar.com). Needless to say these metrics caught our eye right away, and once we dug into the construction of the fund, we became even more comfortable with the idea of implementing SPHD.
SPHD is a multi-factor fund, but in the most simple and straightforward way that a fund can be multi-factored. The two factors are dividend yield and standard deviation. That’s it. There isn’t a convoluted “quality” factor that combines multiple factors or any other sort of proprietary factor that you’ve never heard of before. The index takes the 75 highest dividend yielding securities from the S&P 500, and then selects the 50 stocks with the lowest standard deviation out of those 75. Those 50 are then dividend weighted, and you’re done. The methodology fits the description of the fund perfectly, and the process results in the performance that was mentioned above.
We like it when things are simple and effective here at iSectors, and the PowerShares S&P 500 High Dividend Low Volatility ETF is exactly that: simple in its multi-factored approach, but effective in delivering desirable risk adjusted returns.