by Kyle Woodley | October 24, 2012 6:30 am
Ladies and gentlemen, boys and girls, children of all ages! PowerShares proudly brings you something amazing! Something stupendous!
Something marketed really damn well.
The recently launched PowerShares S&P 500 High-Dividend Portfolio (NYSE:SPHD) exchange-traded fund might or might not be the best ETF ever — but you’ve got to give a tip of the hat to the marketing department, which by talent or luck managed to lock down three great selling points, all in one fund.
Let’s take a look:
I probably don’t have to tell you, but dividend yield is the absolute hotness of the markets this year. Investors have piled into junk bonds, REITs, MLPs — you name it — amid fears of volatility and economic uncertainty across the globe.
SPHD completely feeds into yield-hunters’ habit, investing at least 90% of its assets in 50 stocks taken from a pool of the S&P 500’s 75 top-yielding stocks.
This is where the fund gets its twist. Out of that pool of 75 stocks, SPHD takes the 50 securities with the lowest volatility over the past 12 months. The fund is then weighted by dividend yield (the higher a stock’s yield, the greater its weight).
As an added bundle of security, the fund will never hold any more than 10 securities from any single S&P sector — granted, 10 out of 50 shares still can add up to a great deal of weighting, but this caveat should shield investors somewhat from an industry-wide blow.
Initially, SPHD unsurprisingly leans heavily toward utilities and consumer staples. The breakdown:
|Sector||% Holdings||Sector||% Holdings|
|Sector data as of 10/22/12|
The dividend-weighted nature of the index creates a mixed bag of holdings, however.
The heaviest weight — the only stock above 3% — goes to Pitney Bowes (NYSE:PBI), the laughably outdated purveyor of postage meters and franking machines. The good news: PBI yields 10.8% and has been dependably paying dividends for the better part of a century. The bad news: PBI never recovered after its financial-crisis plunge, has shed almost half its worth in the past three years and is trading at prices last plumbed in the early ’90s.
And again: That whole outdated business thing.
Top five weightings are rounded out by non-Big 2 telecom stocks Windstream (NASDAQ:WIN, 10.4% yield) and CenturyLink (NYSE:CTL, 7.6%), Health Care REIT (NYSE:HCN, 5%) and mid-cap savings and loan People’s United Financial (NASDAQ:PBCT, 5.2%).
Nice yields, but a look at the performance of the fund’s top holdings reveals something of a red flag:
|Holding||Weight||YTD Return||Holding||Weight||YTD Return|
|Note: S&P 500 up 12.5% YTD Holding data as of 10/22/12|
Considering the high-dividend, low-volatility bent of the SPHD, investors obviously won’t go into the fund looking for screaming capital gains. But the problem with such a pool of high-dividend stocks is that some of them reasonably would have higher yields not just because of generous payouts, but also declining share prices — and clearly the volatility filter isn’t enough to keep out all the stinkers.
Keep this in mind. Dividends can make up for only so much in capital losses, after all.
Lest you think this is an ego massage of Invesco (NYSE:IVZ) or PowerShares, the “trusted name” I’m referring to is the S&P 500, which is included in the fund’s name. This fits into a great observation from Dennis Hudachek over at IndexUniverse:
“… 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.”
Why is that important? AUM of $100 million is something of an unofficial benchmark for ETFs — namely, it’s a consensus number at which an ETF likely can be assumed to be profitable, and thus investors can throw away worries about the fund suddenly closing for business.
Granted, the $100 million figure itself is argued, and ETFs with small AUM are perfectly capable of generating fantastic returns, but still — it’s a nice intangible.
Again, the PowerShares S&P 500 High-Dividend Portfolio hits the mark on marketing, no question. In addition to the ETF’s primary purpose, it also boasts two other attractive numbers: A low 0.3% expense ratio and a juicy projected 4% yield (based on the index).
The fund itself isn’t as screamingly awesome. I personally shudder to think of having Pitney Bowes in my pocket, let alone the top holding in my ETF. And the low road to yield means other questionable holdings could sneak their way in.
Still, the current broader construction of SPHD — deeply rooted in utilities, consumer staples and telecoms — accurately reflects the purpose of a high-dividend, low-volatility fund, which would help me sleep a little better at night.
If nothing else, SPHD should provide investors a respectable source of slow, steady income.
Kyle Woodley is the Assistant Editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @IPKyleWoodley.
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