The Invesco S&P 500 High Dividend Low Volatility (SPHD) ETF has done well this year. It has risen in the last eleven consecutive weeks, moving to a record high of $51. Its price return has been 21%, outperforming the S&P 500 and Nasdaq 100 indices.
SPHD’s total return, which also includes dividends, has risen by 22% compared to the S&P 500 index’s 18.20%.
What is the Invesco S&P 500 High Dividend Low Volatility ETF?
The Invesco S&P 500 High Dividend Low Volatility is a fund that aims to give investors access to a small group of companies that have a long track record of paying dividends and having little volatility. It tracks the S&P 500 Low Volatility Index.
The fund has an expense ratio of 0.30%, which is much higher than what the popular Schwab US Dividend Equity ETF (SCHD). It also has a smaller dividend yield of 3.55%, lower than SCHD’s 3.75%.
Unlike most ETFs, the SPHD fund is mostly made up of utilities, which make up about 20% of all companies in the fund. Utilities are then followed by consumer staples, real estate, healthcare, energy, and communication services.
Altria, one of the biggest tobacco companies in the world, is the biggest constituent, accounting for 2.91%. It is followed by Crown Castle, a real estate investment trust (REIT) that offers services in the telecom industry.
The other big company in the SPHD ETF is Verizon, one of the top telecom companies in the US, followed by AT&T. It also has a big stake in VICI Properties, Bristol-Myers Squibb, Dominion Energy, Realty Income, and Pfizer. These top ten companies account for about 25% of all firms in the fund.
Many of these companies have a leading market share in their industries and are some of the best known names in their industries. Altria and Philip Morris have done well this year as most tobacco companies continue soaring.
Realty Income, VICI, and Crown Castle are some of the most popular REITs in the industry and analysts expect that they have more upside.
Federal Reserve cuts
The SPHD ETF has a number of catalysts ahead. First, the fund could do well in the next few months as the Federal Reserve starts to cut interest rates. In most periods, these funds tend to do well when the Fed is cutting rates.
The Fed will cut these rates since the country’s inflation has continued falling while the labor market has deteriorated. Recent economic data shows that the headline Consumer Price Index (CPI) has retreated to 2.5%, its lowest level in over two years.
Dividend-focused ETFs will likely see more inflows as many dividend-focused investors move back to these assets. Indeed, the SPHD ETF has had over $385 million in inflows this year.
The other important catalyst for the ETF is corporate earnings, which are expected to continue doing well. The second-quarter earnings growth was about 10% while the third-quarter is expected to come in at 4.3%. If this is correct, it will be the fifth consecutive quarter of growth.
Risks for investing in SPHD
There are several risks to have in mind when investing in the SPHD ETF. First, tobacco companies like Altria and Philip Morris are big constituents of the fund. These funds have jumped by over 30% this year.
Therefore, there is a risk that these companies will reverse in the coming months as investors take profit.
Second, analysts have mild outlook for some of the top companies in the fund. For example, Altria stock was trading at $50.70, slightly lower than the average estimate of $51.7. Philip Morris was trading at $123.56, lower than the average $125.97.
The same is true with Crown Castle, which was trading at $120, higher than the average $111 while Verizon’s stock target is $45.65, higher than the current $45. Pfizer’s stock was at $30, lower than the estimated $33.
Third, the SPHD ETF is usually thinly traded. On Monday, its volume was over 573,112, lower than the average 697k. These are small volumes for a fund with over $3.7 billion.
Additionally, in most cases, there is a rotation from value stocks to technology companies when the Fed starts cutting rates. SPHD does not have many tech companies, which stands at just 3.22%. The tech companies in the fund are IBM and Cisco, which are seen as old-tech firms.
SPHD ETF has become overbought
The Invesco S&P 500 High Dividend Low Volatility’s other risk is that it has become highly overbought. It has moved to the overbought point at 75. On the other hand, the Money Flow Index (MFI) has formed a bearish divergence pattern. In most periods, this is usually a sign that an asset will start falling.
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