SPHD: Stable ETF, Appropriate Investment For Current Scenario

ETF Overview

The Invesco S&P 500 High Dividend Low Volatility Portfolio ETF (NYSEARCA:SPHD) is a United States (US) based diversified exchange traded fund (ETF) launched and managed by Invesco Capital Management LLC. SPHD fully replicates the composition of S&P 500 Low Volatility High Dividend Index and invests in less volatile high dividend paying stocks of large-cap companies. As a result, this fund invests majorly in the stocks of core sectors namely energy, materials, utilities, real estate, industrial and consumer defensive.

Almost two-third of SPHD’s entire portfolio is invested in those above-mentioned sectors, with approximately 40 percent investments in the companies from energy, and consumer defensive sectors. A good thing about this fund is that only 15 percent of its investments are in shares of technology, communication, and financial companies – those are more volatile by nature.

Historical Price and Dividend

As this fund invests in 50 least volatile stocks of the previous year, it is expected to generate a very steady but low price growth. Price growth over the past one year, three years, and five years have been 2.33 percent, 11 percent, and 18.2 percent, respectively. Since its inception 9.5 years back, the price has gone up by 84 percent, i.e., a CAGR of 6.6 percent.

This diversified ETF was formed on October 18, 2012 and has been paying steady monthly dividends since November 2012, i.e. for almost 10 years. For this entire period, it has generated an average yield of around 3.7 percent. Its current yield (3.67 percent) is also close to this. So, over the long term, the fund has delivered a total return in excess of 10 percent.

Invesco S&P 500 High Dividend Low Volatility Portfolio ETF has an asset under management of $3.28 billion, and an expense ratio of 0.3. The 52-week range of $41.53 and $49.61 underlines the fact the stock is less volatile than most ETFs available in the market. But that doesn’t mean that this stock has been extremely stable.

Major Stocks in the Portfolio

The past month has been poor for Invesco S&P 500 High Dividend Low Volatility Portfolio ETF, when its price dropped by almost six percent. A closer look at its top 25 holdings (constituting almost 60 percent of its portfolio) reveals that except three stocks – Amcor plc (AMCR), Merck & Co., Inc. (MRK), and AT&T Inc. (T) – all other stocks failed to generate positive growth. However, we must also remember the fact that, in general, there is a downward movement in the US stock market.

But, the positive news is, despite such poor performance in the past one month, this diversified ETF has been able to generate 3 percent and 7 percent growth over the past three months and six months respectively. Incidentally, weightage of all these 25 stocks in SPHD’s portfolio ranges between approximately 2 percent to 3.5 percent.

Another 15 stocks have been able to generate at least three percent growth during the past three months. These stocks were Sempra (SRE), Chevron Corporation (CVX), The Williams Companies, Inc. (WMB), The Southern Company (SO), Consolidated Edison, Inc. (ED), Kinder Morgan, Inc. (KMI), Duke Energy Corporation (DUK), Pinnacle West Capital Corporation (PNW), PPL Corporation (PPL), Edison International (EIX), Ventas, Inc. (VTR), AbbVie Inc. (ABBV), International Business Machines Corporation (IBM), Cardinal Health, Inc. (CAH), and FirstEnergy Corp. (FE).

Valuation

In addition to the above mentioned 18 stocks, another three stocks – Philip Morris International Inc. (PM), The Kraft Heinz Company (KHC), and Altria Group, Inc. (MO) – recorded significant positive growth over the past six months. Thus, over the short run, the portfolio of SPHD has been quite effective. I expect the stock to move in the upward direction in the coming months, as the short term simple moving averages (SMAs) are comfortably placed over the long term SMAs. The 50-day SMA (47.16), 100-day SMA (46.26), and 200-day SMA (44.91) indicate a price growth for SPHD.

Weighted average Price/Cash flow (P/CF) ratio of the component stocks of SPHD comes to around 8.75, compared to the index’s P/CF ratio of 9.01. SPHD’s Price to Book (P/B) ratio of 2.06 is also slightly lower than the index’s P/B ratio of 2.51. We can say this diversified ETF is marginally undervalued. This assumption gets further validation as the price/sales (P/S) of 1.36 is relatively lower than that of the index (1.68). However, SPHD’s Price/Equity (P/E) ratio (14.82) is slightly higher than that of the index (14.46).

Historically, Invesco S&P 500 High Dividend Low Volatility Portfolio ETF has generated a total return in excess of 10 percent since its inception almost 10 years ago. As this ETF is investing in yield generating stocks, I don’t think it will be a problem for it to deliver a dividend between 3 and 4 percent in the coming years. And despite being well diversified and investing only in less volatile high yield generating stocks, SPHD’s portfolio has generated low but steady price growth.

As the majority of its top holdings are expected to generate positive growth, I assume this steady growth to continue over the longer time horizon. I’d buy or hold the Invesco S&P 500 High Dividend Low Volatility Portfolio ETF in order to earn a steady income and stable price growth. However, investors should not expect a very high return on their investments due to its emphasis on less volatile stocks.