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What Makes This High Yield Dividend ETF Tick

September 25, 2019 8:43 am
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What Makes This High Yield Dividend ETF Tick

High dividend exchange traded funds are coming back into style amid Federal Reserve rate cuts and declining Treasury yields. One such ETF that is flying under the radar is the SPDR Portfolio S&P 500 High Dividend ETF (NYSE:SPYD).

What Happened

SPYD, which tracks the S&P 500 High Dividend Index, may not be getting much press, but the fund is up more than 6% this month, a move that has boosted its year-to-date return into the double digits. With a dividend yield of 4.7%, SPYD is undoubtedly attractive in today's low yield environment, but investors considering the fund should examine how sector and security selection impact returns.

“We analyzed the returns for the S&P 500 High Dividend Yield Index ('the high dividend strategy') and the S&P 500('the market') over the past year and year-to-date through August,” said State Street in a recent note. “We found that in each time period, the sector biases for the high dividend yield strategy were a net positive contributor. The stock weights, however, were net detractors. In almost every sector for both periods, security selection was negative.”

This underscores a problem investors may encounter when picking among individual high-yield stocks: some equities in this space are financially strained and may not be able to keep with high payouts.

Why It's Important

SPYD allocates over 30% of its combined weight to the high-yield real estate and utilities sectors, the latter of which has recently been making a series of all-time highs. Both sectors function as bond-like groups, making them attractive when interest rates decline.

“Stocks with high dividends, therefore, could be said to have been poor performers, but not high dividend sectors,” according to State Street. “The latter point explains why two bond-proxy sectors (Utilities and Real Estate) can be top performers but bond-proxy dividend paying equities cannot.”

An obvious sector level detractor for SPYD has been energy. The ETF devotes 12.1% of its weight to that group, nearly triple the S&P 500's exposure to energy stocks.

What's Next

Another consideration with dividend ETFs is how factors, such as quality and value, influence returns. For SPYD, critical factor-level contributors have been size, value, profitability, and growth.

“Dividend yield was actually a positive contributor,” said State Street. “This confirms the notion that the dividend style should produce positive returns when bond rates are falling, and it refutes the misperception that 'dividends' just didn’t work as rates fell.”

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