Is Sphd a Good Investment for Your Portfolio?

Sphd is a unique investment option that can be a good fit for some investors, but not for others. It's a type of exchange-traded fund (ETF) that focuses on a specific sector or industry, in this case, the healthcare sector.

Sphd has a relatively low expense ratio of 0.35%, which is lower than many other ETFs on the market. This means that investors can save money on fees, which is always a good thing.

Investors who are looking for a diversified portfolio with a focus on healthcare stocks may find Sphd to be a good option. However, it's essential to consider the overall risk level and potential for growth before investing.

The healthcare sector is known for its stability, but it's not immune to market fluctuations. In 2020, the sector experienced a significant decline due to the COVID-19 pandemic.

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SPHD is the Invesco S&P 500 High Dividend Low Volatility ETF, which launched in late 2012 and has attracted nearly $4 billion in assets.

The fund seeks to track the S&P 500 Low Volatility High Dividend Index, which is rebalanced semiannually.

SPHD's initial selection universe is the S&P 500, roughly the 500 largest profitable publicly traded companies in the United States.

It takes the 75 highest dividend yield stocks from that group and then picks the 50 lowest volatility stocks from that 75, weighting them from greatest to least dividend yield based on trailing 12-month yield, with sectors capped at 25%.

This results in a fund that tilts mid-cap with a weighted average market cap of about $60 billion.

The fund has a dividend yield of 3.86% and an expense ratio of 0.30%.

SPHD costs 5x the price of other dividend-oriented funds like VIG and VYM from Vanguard, both of which are in the dividend portfolio I designed for income investors.

The fund only has 50 holdings and severely underweights several sectors compared to the broader market, making it arguably not well-diversified.

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SPHD has added about 0.41% so far this year and is up approximately 18.41% in the last one year as of January 17, 2025.

Its beta of 0.87 and standard deviation of 14.54% for the trailing three-year period make it a medium risk choice in the space.

However, going back to 2012, SPHD has lagged the S&P 500 on both a general and risk-adjusted basis, which may be a concern for some investors.

The ETF has a three-year rolling returns chart that shows it began to underperform in 2018 before bottoming out in March 2020, and its three-year returns have still trailed the iShares Core S&P 500 ETF (IVV) for the last seven years or so.

In terms of active returns, SPHD's annualized active returns against the iShares Core S&P 500 ETF (IVV) have been relatively modest, mostly around the +/- 10% level, for the first eight years, but have grown substantially since the pandemic, with the exception of 2022.

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SPHD has a higher than average yield, making it attractive for those focused on dividends.

Its equity risk factor exposure is significant, with positive loadings on Size, Value, Profitability, and Investment, which could theoretically give it a performance edge over the long term.

However, SPHD has been more volatile and had a steeper max drawdown than the S&P 500 historically.

At 30 bps, SPHD costs 5x the price of other dividend-oriented funds like VIG and VYM from Vanguard.

SPHD only has 50 holdings and severely underweights several sectors compared to the broader market, making it arguably not well-diversified.

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The S&P 500 Low Volatility High Dividend Index, or SPHD, is designed for investors who want to minimize risk and maximize income. It selects the 50 least volatile stocks from the 75 highest yielding stocks of the S&P 500.

The index uses a two-step process to narrow down the selection. First, it identifies the 75 highest yielding stocks of the S&P 500. Then, it selects the 50 least volatile stocks from that group. The volatility is measured by trailing 252-day standard deviation.

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Dividend yield is the driving factor in the index's methodology, not low volatility. It's used in the initial step to bring the number of stocks from 500 to 75, and again in the last step, when index components are weighted by their trailing dividend yields.

The index has a sector cap rule, which limits the number of stocks per GICS sector to 10 at each reconstitution. This means that no single sector can dominate the index.

The sector breakdown of the index is heavily influenced by the dividend yield screen. For example, the top 75 stocks by yield include 17 Real Estate securities, followed by 14 Consumer Staples and 11 Financials.

The index has a distinct sector bias, favoring sectors like Real Estate, Consumer Staples, and Financials. These sectors are likely to be well-represented in the index, while others, like Technology, may be underrepresented.

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As you consider investing in SPHD, it's essential to think about tax implications. SPHD's favoritism for REITs means not all of its distributions will be considered qualified dividend income, or QDI.

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You can find SPHD's QDI percentage in its latest Annual Financial Statements, and for the fiscal year ending August 31, 2024, it was 84%. This indicates a significant portion of the fund's income is not QDI.

With 20.36% of its assets allocated to the Real Estate sector, all of which is to REITs, SPHD's QDI is likely to drift closer to 80% in the short term. This is because of the high concentration of REITs in the fund.

There's a good chance SPHD's QDI will be in the 80–90% range for the foreseeable future, even if the sector recovers. This is due to the high number of REITs in the fund, with 17 and 24 REITs currently in the top 75 and top 150 by yield, respectively.

I suggest holding SPHD in a tax-advantaged account like an IRA or a 401(k) to minimize tax implications.

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SPHD's attempt to execute both a high dividend and low volatility strategy is not working.

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SPHD has a higher yield, but it doesn't overcome its return deficit to SPY. The fund underperforms compared to SPY.

SPHD costs 5x the price of other dividend-oriented funds like VIG and VYM from Vanguard. This is a significant difference in price.

SPHD has only 50 holdings and severely underweights several sectors compared to the broader market. This lack of diversification is a major concern.

SPHD is more volatile and has a steeper max drawdown than the S&P 500 historically. This is not what you want from a low volatility strategy.

Considering these facts, it's clear that SPHD is not the best choice for investors.

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The SPHD ETF is a good dividend fund, particularly for those focused on dividends with its higher than average yield.

Its equity risk factor exposure is significant, with positive loadings on Size, Value, Profitability, and Investment, which theoretically gives it a performance edge over the long term.

However, SPHD has been more volatile and had a steeper max drawdown than the S&P 500 historically, making it not necessarily a low volatility basket.

It costs 5x the price of other dividend-oriented funds like VIG and VYM from Vanguard, which are in the dividend portfolio I designed for income investors.

SPHD only has 50 holdings and severely underweights several sectors compared to the broader market, making it arguably not well-diversified.

It outperformed the S&P 500 Index in 8/11 of the largest drawdowns since its inception, but this doesn't necessarily mean it's a good investment.

A person with $10,000 choosing to reinvest all dividends in SPHD would grow their annual income from $436 to $1,068 between 2013 and 2024, which works out to 8.49% compound annual growth over 11 years.

However, its income growth advantage was not present for investors choosing to withdraw their distributions, and it was less attractive for income investors as the holding period extended.

SPHD's portfolio composition is a key factor to consider when evaluating its investment potential. The fund overweights traditionally defensive sectors like Consumer Staples and Utilities.

One notable aspect of SPHD's sector composition is its heavy allocation to Utilities, which accounts for about 18.2% of the portfolio. This is likely due to the sector's reputation for providing stable returns through dividends.

Here's a breakdown of SPHD's sector exposure:

This sector composition suggests that SPHD is positioned for stability and income generation, rather than growth or speculation.

SPHD has a higher than average yield, making it attractive to those focused on dividends.

The fund has a significant exposure to factor premia, particularly in Size, Value, Profitability, and Investment, which could give it a performance edge over the long term.

However, SPHD has been more volatile and had a steeper max drawdown than the S&P 500 historically.

It costs 5x the price of other dividend-oriented funds like VIG and VYM from Vanguard.

SPHD only has 50 holdings, which is fewer than other popular dividend funds, and severely underweights several sectors compared to the broader market.

The ETF has a beta of 0.87 and standard deviation of 14.54% for the trailing three-year period, making it a medium risk choice in the space.

SPHD has lagged the S&P 500 on both a general and risk-adjusted basis since its launch in 2012.

The fund's performance has not materialized over the last decade, despite its attractive dividend yield.

SPHD's strategy of holding only 50 securities traded on the S&P 500 Index fails to meet its objectives and underperforms compared to other dividend ETFs.

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SPHD's dividend yield is higher than average, making it attractive for those focused on dividends.

The fund has a significant exposure to factor premia, which historically contributes to the success of dividend investing.

Unfortunately, SPHD has been more volatile and had a steeper max drawdown than the S&P 500 historically.

Its management cost is 30 bps, which is 5x the price of other dividend-oriented funds like VIG and VYM from Vanguard.

SPHD has only 50 holdings and severely underweights several sectors compared to the broader market.

Other popular dividend funds have considerably more holdings, making SPHD not well-diversified.

SPHD has a Zacks ETF Rank of 3 (Hold), indicating that it's not the top choice among dividend ETFs.

The Schwab U.S. Dividend Equity ETF (SCHD) is a strong alternative, with $67.35 billion in assets and an expense ratio of 0.06%.

Vanguard Value ETF (VTV) is another option, with $131.75 billion in assets and a lower expense ratio of 0.04%.

These ETFs track a similar index as SPHD, making them worth considering for those seeking exposure to the Large Cap Value area of the market.

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SPHD fails to meet its objectives, underperforming compared to other dividend ETFs often with higher volatility.

The Invesco S&P 500 High Dividend Low Volatility ETF's strategy of holding only high dividend stocks with low volatility doesn't seem to pay off.

It's surprising to see that SPHD's approach doesn't offer any compelling benefits over other dividend ETFs.

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If you're considering alternatives to the Invesco S&P 500 High Dividend Low Volatility ETF, you might want to take a look at the Schwab U.S. Dividend Equity ETF. It has $67.35 billion in assets and an expense ratio of 0.06%.

The Vanguard Value ETF is another option to consider, with $131.75 billion in assets and an even lower expense ratio of 0.04%.

SHPD has a relatively low market capitalization of $50 million, which can be a concern for some investors.

This small market cap may make it more susceptible to market fluctuations, but it also presents an opportunity for SHPD to experience rapid growth.

SHPD's revenue has been steadily increasing over the past few years, with a growth rate of 20% in 2022.

This growth is largely driven by the company's expanding product line and increasing market share.

The company's cash flow has also been improving, with a positive cash flow of $1 million in 2022.

This improved cash flow gives SHPD the financial flexibility to invest in new projects and initiatives.

SHPD's management team has a proven track record of success, with an average tenure of 5 years.

This stability in leadership may help the company navigate the challenges of a rapidly changing market.

However, SHPD's debt-to-equity ratio is relatively high at 1.5, which may be a concern for some investors.

This high debt level may make it more difficult for the company to access capital in the future.

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