Dividend And Low-Volatility Stocks In One ETF

Includes: HDV, SPHD
by: Tom Lydon

Low volatility and dividend yields have been two prevailing themes among gun-shy investors in the current market environment. Invesco PowerShares seeks to fulfill the two needs with its new high dividend portfolio exchange traded fund.

According to a press release, the PowerShares S&P 500 High Dividend Portfolio (NYSEARCA:SPHD), which tries to reflect the performance of the S&P Low Volatility High Dividend Index, will begin trading on Thursday, October 18.

The underlying index tracks 50 stocks taken from the S&P 500 index that have historically provided high yields and exhibited lower relative volatility. The index also has a modified cap-weighting methodology that weights securities based on dividend yields.

"The PowerShares S&P 500 High Dividend Portfolio combines two key objectives that are important to many investors today: an emphasis on high dividend equities with the well-documented benefits of low-volatility securities," Ben Fulton, Invesco PowerShares managing director of global ETFs, said in the press release. "The fund's underlying index is designed to perform well in absolute terms and on a risk-adjusted basis compare to the S&P 500 index, and had an average dividend yield of 4.51% as of Sept. 30, 2012."

In comparison, the S&P 500 currently yields about 2.11%.

The new ETF is the latest in the fund provider's line of factor-based, "intelligent" beta ETF products. These products provide actively managed strategies in a passive indexing structure by customizing the underlying indices based on factor tilts, like low volatility, high beta, high quality, relative strength and high dividends.

Invesco PowerShares says it has $3.7 billion in its factor-driven ETFs.

While low-volatility plays may perform well during volatile market conditions, the low-volatility strategy may not perform as well in strong short-term rallies since the strategy selectively excludes riskier securities that would benefit during bullish conditions.

Investors trying to limit portfolio swings have been drawn to low-volatility and dividend-themed ETFs.

For example, skittish investors looking for strategies that take a more cautious approach in the stock market added more than $1 billion to low-volatility ETFs in the third quarter.

The iShares High Dividend Equity Fund (NYSEARCA:HDV) is an example of an ETF designed to combine dividend and low-volatility stocks.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.