SPDV: A good idea in theory, but the reality is complicated (NYSEARCA: SPDV)

Prostock-Studio/iStock via Getty Images

This series of articles on dividend ETFs aims to evaluate products based on the relative past performance of their strategies and the quality indicators of their current portfolios. As holdings and their weightings change over time, I may update reviews, usually no more than once a year.

SPDV Strategy and Portfolio

The AAM S&P 500 High Dividend Value ETF (NYSEARCA: SPDV) tracks the S&P 500 Dividend and Free Cash Flow Yield Index since 11/28/2017. It has 55 holdings (plus cash), a payout yield of 3.12% and a total expense ratio of 0.29%.

As described on the WADA website, to be eligible for the index, a company must be listed in the S&P 500 and have a positive dividend yield and free cash flow yield. Eligible companies are ranked on a score based on these two returns, and then the top five companies in each GICS sector are included in the index. There can be fewer than five companies in a sector if fewer than five have returns greater than zero. The index is replenished twice a year with constituents of equal weight.

The fund invests primarily in US companies (98.4% of asset value) in the mid cap (52%) and large cap (48%) segments.

According to the definition of the index, the sectors are of equal weight after each rebalancing, except when less than 5 companies in a sector meet the selection rules. Due to price action, at the time of writing, the heaviest sector is Energy (10.2%) and the lightest is Financials (7.03%). The following chart plots the relative sector weightings in SPDV and the S&P 500 (SPY).

SPDV sectors

SPDV sectors (Graphic: author; data: Fidelity)

The top 10 holdings, listed in the following table along with some fundamental ratios, represent approximately 22% of the asset value. The largest holding weighs 2.2%, so individual stock risks are low.

Teleprinter

name

Mass%

EPS growth %TTM

P/E TTM

P/E front

Yield%

ABBV

AbbVie Inc.

2.19

125.31

24:44

11.13

3.58

BMY

Bristol-Myers Squibb Co.

2.23

177.67

24:31

9.80

2.85

CLC

Chevron Corp.

2.26

371.75

19.21

10.03

3.64

DOW

Dow Inc.

2.19

249.44

7.35

8.64

4.15

GD

General Dynamics Corp.

2.13

4.97

20.77

19.80

2.10

KHC

The Kraft Heinz Company.

2.17

188.47

52.41

16.11

3.73

LMT

Lockheed Martin Corp.

2.19

-8.63

7:65 p.m.

16.57

2.52

NMS

Newmont Company

2.1

-58.63

54.66

21.58

3.05

WMB

Williams Companies, Inc.

2.23

629.12

27.58

24.54

4.95

XOM

Exxon Mobil Corp.

2.14

202.59

15.71

9.00

4.16

Historical performance

Since its inception in November 2017, SPDV has underperformed SPY by 4.36 percentage points in annualized return (see following table). In addition, SPDV presents a higher risk measured in drawdown and volatility (standard deviation of monthly returns). SPDV also lagged popular dividend-focused ETFs: the Schwab US Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation ETF (VIG).

Full return

Annual return

Sample

Sharpe report

Volatility

SPDV

43.39%

8.55%

-40.42%

0.47

19.94%

TO SPY

70.52%

12.91%

-32.05%

0.88

16.66%

SCHD

74.11%

13.45%

-32.29%

0.81

17.09%

VIG

67.89%

12.51%

-29.58%

0.87

14.89%

Data calculated with Portfolio123

The following chart plots the equity value of $100 invested in SPDV and SPY since SPDV’s inception, with all dividends reinvested.

SPDV versus SPY

SPDV vs SPY (Graphic: author; data: Portfolio123)

Compare SPDV to a benchmark strategy

In previous articles, I have shown how three factors can help reduce risk in a dividend portfolio: return on assets, Piotroski’s F-score, Altman’s Z-score, payout ratio.

The following table compares SPDV since its inception with a subset of the S&P 500: stocks with an above-average dividend yield, an above-average ROA, a good Altman Z score, a good Piotroski F score and a ratio of sustainable distribution. The subset is rebalanced annually to make it comparable to a passive index.

Full return

Annual return

Sample

Sharpe report

Volatility

SPDV

43.39%

8.55%

-40.42%

0.47

19.94%

Dividends and quality subset

70.19%

12.86%

-36.62%

0.71

18.14%

Past performance is not a guarantee of future returns. Data source: Portfolio123

SPDV significantly underperforms this dividend quality benchmark. However, the performance of ETFs is real and the subset is hypothetical. My base portfolio contains 14 stocks selected from this subset (more info at the end of this article).

Scan current wallet

SPDV has a portfolio of 55 holdings. It is significantly cheaper than the S&P 500 when it comes to typical valuation ratios, as shown in the following chart.

SPDV

TO SPY

TTM Price/Earnings

12.77

21.92

Price/Book

1.93

4.23

Price/Sales

1.28

2.94

Price/cash flow

7.86

5:15 p.m.

I scanned the SPDV funds with the quality measures described in the previous paragraph. I consider risky stocks to be companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or questionable Altman Z-score, excluding financials and l real estate where these measures are less relevant. With these assumptions, 8 out of 55 stocks are risky and they weigh 15% of the asset value. It’s not very good, but it’s still acceptable.

Based on my calculations, the Altman Z-score Piotroski F-score and Return on Overall Assets are lower than SPY’s overall values. These measures indicate slightly lower portfolio quality than the benchmark.

SPDV

TO SPY

Altman’s Z-score

2.02

3.56

Piotroski’s F-score

6.3

6.5

ROA % TTM

6.02

7.87

Take away

SPDV holds a portfolio with a maximum of 55 large and mid-cap stocks selected according to a strategy based on dividend and free cash flow. It offers balanced sector exposure and the components are held at equal weight. The strategy makes a lot of sense: dividend yield, free cash flow, and equal weights are three well-known positive biases.

However, the result doesn’t look so great. SPDV is a high-risk product both from a technical perspective (historical volatility and declines are significantly higher than the benchmark) and from a fundamental perspective (current quality metrics are below benchmark). ‘benchmark). It may be too early to assess SPDV with only four years of historical data, but the performance since inception has been disappointing compared to SCHD (in the same yield range) or VIG (dividend growth ETF in a range of lower yield).

SPDV only has one star on the Morningstar rating, which I find a bit harsh. At least SPDV didn’t suffer capital degradation like high yield ETFs like Global X Super Dividend US ETF (DIV) (reviewed here). For the sake of transparency, my equity investments are split between a passive ETF allocation (SPDV is not one of them) and an actively managed equity portfolio, whose positions and trades are disclosed in Quantitative Risk & Value.

Sharon D. Cole