Game-Changing S&P 500 High-Div/Low-Vol ETF
October 19, 2012
PowerShares has brought us something very new, and I think the fund is going to be a big hit.
The company behind the Nasdaq 100 ETF, the PowerShares QQQ Trust (NasdaqGM: QQQ) is coming on strong again, this time with the launch of its PowerShares S&P 500 High Dividend Portfolio (NYSEArca: SPHD).
As the name suggests, SPHD will hold some of the highest-yielding companies from the S&P 500 Index.
But SPHD also comes with a slight twist. It’s not obvious from the name, but it incorporates a low-volatility component.
Here’s how it works. Seventy-five of the highest-dividend-yielding stocks are selected from the S&P 500 Index. From those 75 stocks, 50 are selected that exhibit the lowest volatility. The constituents are then dividend-weighted.
Hats off to PowerShares on this one. After all, why not combine two of the largest investment themes from the past year—high dividends and low-volatility—into one fund?
As far as I’m concerned, SPHD actually has three things going for it. The first two, I already made clear.
But the third part is that it’s based on the S&P 500 Index. Even better, it throws this popular index name into its fund name.
The reason this is so smart is that throwing the phrase “S&P 500” into a fund name has so far in the history of the ETF industry been an absolute money magnet.
If you look at the assets under management of the 15 equity funds that incorporate S&P’s most popular index in its fund name, seven have over $1 billion in AUM, six have more than $100 million and only two have less than $100 million.
And the granddaddy of them all, the SPDR S&P 500 ETF (NYSEArca: SPY), was the first ETF created and is currently the largest ETF on the planet, with assets of over $115 billion.
Then there’s the fund’s cost. Its 0.30 percent expense ratio is cheap considering its multifactor methodology. This also makes SPHD one of the cheaper U.S. high-dividend ETFs.
I recently blogged about how it’s increasingly becoming difficult for issuers to launch $1 billion ETFs in a saturated market where every niche looks to be covered.
Since January 2011, there have been only four new ETFs that have surpassed the billion-dollar mark. Of those four, two have been PowerShares funds—the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the PowerShares Senior Loan Portfolio (NYSEArca: BKLN).
PowerShares certainly looks to be coming on strong in recent years, and it’ll be interesting to see if it can add another fund to that exclusive billion-dollar club with SPHD.
SPHD has a few hurdles ahead of itself. In the aftermath of the European Central Bank bond buying and the Fed’s QE3 announcements, it’ll be interesting to see if the low-volatility fund craze since the launch of SPLV in May 2011 has faded somewhat.
The U.S. high-dividend ETF space is also very crowded, with total assets over $45 billion parked in more than 15 U.S.-focused ETFs that specifically select their constituents based on dividends.
An important takeaway is also that first and foremost, SPHD is a high-dividend fund, and the volatility component is secondary. As mentioned earlier, it first eliminates 425 securities from the S&P 500 Index strictly based on dividend yield.
Still, SPHD is certainly the first of its kind and looks like it could be a game changer. I certainly like what I’m seeing.
I think as an investor, we’re in uncharted waters with the massive fiscal deficits from much of the developed world. With central banks throwing in everything they have to help keep markets afloat, I can see volatility being a continued theme.
Plus, with rates at home being so low, searching for higher yield in equities still makes sense. According to S&P’s index fact sheet, the index is yielding well over 4 percent.
If I had to take a guess, even in this crowded space, SPHD will be a big hit. And despite some challenges it faces, I still expect SPHD to do just fine.
At the time this article was written, the author had no positions in the securities mentioned. Contact Dennis at email@example.com.