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Unique S&P 500 ETF: High Income, Low Volatility Bring Investor Love

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When an ETF invests in the S&P 500 while offering less risk and a big yield, what's not to love?

PowerShares S&P 500 High Dividend Low Volatility ( SPHD ) filters the iconic index for 75 companies with the highest dividend yields, then extracts 50 of those that are least volatile.

SPHD was up 5.99% this year through March 2 vs. a 2.39% loss for SPY. It has also outperformed SPY, the largest and oldest U.S. exchange traded fund, over the past three years. On Thursday, it briefly hit an all-time high of 35.42.

Launched in 2012, SPHD combines two popular and important defensive factors, notes Todd Rosenbluth, director of ETF research for S&P Global Market Intelligence.

"In general, for investors who want to stay in the equity market but take on less-than-normal risk, dividend and low volatility products are compelling," Rosenbluth said.

This investing strategy's distillation of the S&P 500 index is resonating with investors.

SPHD's assets have swelled more than 200% to $836.8 million since the end of 2015. Investors poured in $172.1 million of fresh money in the first two months of this year.

What they're getting are top-notch stocks such as AT&T ( T ), a member of the elite IBD Leaderboard. Stocks on this hand-picked list offer superior fundamentals and technicals, which enhance their potential for explosive gains.

AT&T is a top 10 holding in the SPHD stock portfolio. The telecom giant, a defensive play, is holding up well even as the broad market starts to gain some steam.

The company reported strong earnings Jan. 26 and the stock has since soared. It hit a 52-week high of 38.11 on the stock market today .

SPHD yields 3.48% vs. 2.17% for SPY. Its dividend factor recognizes companies for their dividend yield -- AT&T's is 5% -- and not the longevity of dividend payments, Rosenbluth notes.

That tasty income is a big lure for investors at a time when capital appreciation is hard to find.

The defensive tilt to SPHD gives investors more exposure to some of this year's top-performing sectors. Utilities have the top weighting, at 18% of assets. By comparison, the S&P 500 benchmark has 3% in utilities.

The ETF also overweights the real estate sector , which has been showing momentum.

SPHD makes large sector bets, but they tend to be in lower-risk sectors such as utilities and consumer staples, said Rosenbluth.

"The risk is more toward underperforming when the broader market moves higher," he added. Low volatility ETFs protect on the downside, but tend to rise less in a rising market too.

Rosenbluth suggested investors could consider combining an ETF such as SPHD with peers such as SPY or Vanguard S&P 500 ( VOO ) "to overweight their exposure to lower risk stocks."

Stock Holdings

The top three stock holdings in SPHD include CenturyLink ( CTL ), Iron Mountain ( IRM ) and Spectra Energy (SE).

CenturyLink ranks No. 5 in IBD's integrated telecom services industry group. It boasts a strong Composite Rating of 88 and has two straight quarters of accelerating earnings growth.

Iron Mountain, which helps companies manage records and protect data, ranks No. 2 in its industry group. It has a dull 68 Comp Rating, but sports two quarters of improving profits.

Spectra Energy, an oil-and-gas pipeline company, lags in its industry group and has a poor 48 Comp Rating. But it has eight quarters of increasing fund ownership.

SPHD rebalances and reconstitutes twice a year, in January and July.

It provides income investors a steady source of income, by paying out dividends monthly.

The ETF has a 0.30% expense ratio. For SPY, it's 0.09%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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