Little Known Dividend ETF: Not As Compelling As You Think

Summary

• SPDV is not as compelling as it sounds.
• Assets and volume are still very low.
• With one additional criteria, SPDV would have a chance to be a better fund.

In this article, I will be providing a rebuttal, showing the AAM S&P 500 High Dividend Value ETF (NYSEARCA:SPDV) is not as compelling as a fellow author made the fund sound. There are a number of things left out of his article that I will be covering along with additional information that shows why SPDV is nothing special.

Item #1: Low Assets & Low Volume

The first item that was left out was no mention of the low amount of assets and low volume of the fund. SPDV was launched on November 28th 2017, which is a little over 3 months ago, but the fund has yet to see a meaningful volume increase or a build up in assets. Currently the fund only has $2.65 million in assets and over the last month (20 trading days), SPDV has averaged only 4,602 shares/day in volume. Out of the last 20 trading days, 7 (35%) have had volume below 1,000 shares and 13 (65%) have had volume below 5,000.

Item #2: Wide Spreads

Since SPDV is thinly traded, the fund has wide spreads in comparison to the numerous competing dividend ETFs. As you can see in the table below, SPDV has much wider spreads than other larger dividend ETFs.

	Average Spread
SPDV	0.15%
iShares Core High Dividend ETF (HDV)	0.02%
iShares Select Dividend ETF (DVY)	0.01%
Vanguard Dividend Appreciation ETF (VIG)	0.01%

Click to enlarge

Table data from ETF.com

Item #3: Average Costs & Competition

The author did mention that DVY has a higher expense ratio than SPDV, however, many dividend ETFs have a lower expense ratio than SPDV. When investors see how many choices they have, a fund with an average expense ratio will not stick out of the group. The dividend ETF space is one of the most crowded and most competitive spaces within the ETF market. To succeed and be able to gather assets, a fund needs to be low priced and provide quality performance.

“SPDV charges average fees, but competes in a crowded space with many ultra-low-cost peers.” ~ETF.com

As I will detail below in item #4, since the inception of the index, the performance has been inline with S&P 500. Unless this changes and SPDV starts to outperform, the fund will not likely gather enough assets to reach critical mass.

Item #4: Performance vs. Benchmark (S&P 500)

I looked at the performance of the index that SPDV tracks, since the inception on October 2nd 2017 in comparison to the S&P 500 index (SPY) and as you can see; its performance is nothing special. It has pretty much mirrored the S&P 500. For those wondering, yes, both the index for SPDV and the S&P 500 have dividends included.

*S&P 500 is the White Line

ThinkorSwim

Improvement Idea

When looking at the holdings of SPDV, It is easy to see why the fund has had an inline performance even though the fund has a higher dividend than the S&P 500. SPDV has companies that generate lots of free cash flow, but has a large number of companies that have declining free cash flows. I looked at free cash flow data for each of the holdings on Gurufocus and found that out of the 53 stocks that SPDV holds, 22 posted y/y declines in free cash flow. These 22 stocks account for 40.35% of the weighting within the ETF and over the last year, this group of stocks has posted a median return of -0.41%. In comparison, the remaining 31 stocks that have increased free cash flows y/y have posted a median return of 2.23%.

Holdings & Dividend

I compiled the following list of the companies that are included in SPDV and had increasing free cash flow y/y. The weight of each company is the same relative weight that each company currently has in SPDV. I have also included the current dividend yield and an estimate for what the yield would be for this group of holdings. As you can see from the tables and chart below, the “new” SPDV would maintain its diversification and provide a higher dividend yield. In addition, by removing companies that have declining free cash flows y/y, the performance of the fund would likely improve as well.

			Weight	Div Yield	Weight x Yield
(ABBV)	ABBVIE INC	Health Care	3.61%	3.35%	0.12%
(AES)	AES CORP	Utilities	3.20%	4.81%	0.15%
(BA)	BOEING CO	Industrials	3.44%	1.97%	0.07%
(CF)	CF INDS HLDGS INC	Materials	3.34%	2.86%	0.10%
(CMI)	CUMMINS INC	Industrials	2.80%	2.71%	0.08%
(CPB)	CAMPBELL SOUP CO	Consumer Staples	3.02%	3.25%	0.10%
(CSCO)	CISCO SYS INC	Information Technology	3.47%	2.62%	0.09%
(CTL)	CENTURYLINK INC	Telecommunication Services	3.41%	12.08%	0.41%
(ED)	CONSOLIDATED EDISON INC	Utilities	3.10%	3.84%	0.12%
(EMN)	EASTMAN CHEM CO	Materials	3.56%	2.11%	0.08%
(ETN)	EATON CORP PLC	Industrials	3.17%	3.26%	0.10%
(F)	FORD MTR CO DEL	Consumer Discretionary	2.92%	5.64%	0.16%
(FE)	FIRSTENERGY CORP	Utilities	3.36%	4.56%	0.15%
(GIS)	GENERAL MLS INC	Consumer Staples	2.83%	3.84%	0.11%
(GWW)	GRAINGER W W INC	Industrials	3.31%	1.89%	0.06%
(HBAN)	HUNTINGTON BANCSHARES INC	Financials	3.34%	2.70%	0.09%
(HST)	HOST HOTELS & RESORTS INC	Real Estate	2.88%	4.31%	0.12%
(IBM)	INTERNATIONAL BUSINESS MACHS COM	Information Technology	3.17%	3.79%	0.12%
(KSS)	KOHLS CORP	Consumer Discretionary	3.19%	3.38%	0.11%
(M)	MACYS INC	Consumer Discretionary	3.64%	5.05%	0.18%
(MPC)	MARATHON PETE CORP	Energy	3.12%	2.72%	0.08%
(PFE)	PFIZER INC	Health Care	3.22%	3.79%	0.12%
(PRU)	PRUDENTIAL FINL INC	Financials	2.85%	3.35%	0.10%
(SJM)	SMUCKER J M CO	Consumer Staples	3.36%	2.42%	0.08%
(SPG)	SIMON PPTY GROUP INC NEW	Real Estate	3.10%	5.00%	0.16%
(STX)	SEAGATE TECHNOLOGY PLC	Information Technology	3.52%	4.48%	0.16%
(T)	AT&T INC	Telecommunication Services	3.31%	5.42%	0.18%
(VLO)	VALERO ENERGY CORP NEW	Energy	3.12%	3.48%	0.11%
(VTR)	VENTAS INC	Real Estate	3.04%	6.17%	0.19%
(VZ)	VERIZON COMMUNICATIONS INC	Telecommunication Services	2.98%	4.83%	0.14%
(WDC)	WESTERN DIGITAL CORP	Information Technology	3.63%	2.10%	0.08%
				Est. Fund Yield	3.92%

Click to enlarge

SPDV Dividends

1st 3 months Div x4	$0.8689844
Current Price	$26.57
Yield	3.27%

Click to enlarge

Closing Thoughts

In closing, I do not believe SPDV will be able to be successful unless its performance starts to separate from that of the S&P 500. If the total return is essentially the same as the S&P 500, SPDV not only has to compete in the crowded dividend ETF space, investors could just purchase one of the many low cost S&P 500 ETFs and still get the same total return, if this pattern of mirroring the S&P 500 holds. To make SPDV worth considering, the fund would have to provide better performance, gather assets and have increasing volume.

Analyst’s Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Ventureshadow]

SPDV is not "compelling" but it's pretty good. It seems a bit better than SPY because of the higher dividend, and trend to be a bit higher on price charts. TTFS was compelling several years ago, but no longer.

[yoinum]

Enjoyed different aspects of these comments as well as the article. I am far from expert in choosing ETFs, but from the onset, this one appears to be somewhat promising. Not in yet, though. Want to see its longer term performance. My gut says this is not the best time to put new money in market., although seeing the DOW rise 440 points in a day is disheartening. Warren Buffett has how many billions off the table? He may know something we mere mortals don't.

[JTLawlor]

Mornin! Thank you Mr. Kenagy for your additional information, and taking the time to inform SA readers of these factors, I too experienced a total loss in a Low Volume ETF (GGGG global gold miners was a proxy for GLD) that wasN't listed on the ETF Deathwatch until; its' 6th month upon which I just went up in smoke. (No tax losses for IRAs)...So, I-ll be watching SPDV, and hoping that it becomes largely successful (but withdrawing my GTC buy for a few months)..
and Mr. Kemmerling:
Thank you for your thought and dedicated work to bring the SPDV to the marketplace! i sincerely hope that many other investors (esp. dividend income investors looking also for growth!!) will become informed of this product and But-In!!

Good luck and Good Investing - to all!!
p.s. Dale: I always appreciate your candor and insights - in this case I am reminded that for new entrants (in all fields) the first year is the most critical..(winners and losers)...(Volume IS critical in determining <> winners and losers)

[Dale Roberts]

Brad, respectfully, I think you stepped outside of your knowledge level.

I bought Vanguard's VDY in Canada (higher dividend yield offering) in the first month or two of its launch. It had shaky dividend reporting or paying and low volumes etc etc etc. I knew it would settle in and start to weight its components. It's been a great holding. Assets now $444 million which is not bad for a Canadian ETF. It has a modest market beat and lower volatility. It did its thing.

Measuring a brief period won't often tell us much. You'll have to give this one time to demonstrate its factor strength, it the strength exists.

Dale

[Brad Kenagy]

@Dale Roberts,

Thank you for the comments. I have not stepped outside my knowledge level, I know how to spot an ETF that has the potential to close: See TUTT

https://seekingalpha.c...

VDY is not an apples to apples comparison either, since the fund is in Canada, which has a much smaller ETF market than the United States.

[Dale Roberts]

Yup it was not fair, our market is smaller and less liquid.

Dale

[danger30q]

I work on a trading desk at a large wealth management firm and I can confirm that average trading volume of ETFs is irrelevant. I've filled $2 billion ETF orders with great executions and ease when the average daily $ trading volume was a few million. The liquidity of the underlying securities is what matters most.

[danger30q]

Small assets under management and wide spreads should be of little concern to long term ETF investors. Wide spreads can be countered by GTC limit orders. All ETFs start out small and I'm not concerned about the issuer's ability to attract more assets.

[Kurtis Hemmerling]

Brad,

1. Volume is not very relevant with ETFs. Trading volume has no bearing on liquidity. ETFs are very different than stocks. Please explain this part of your argument to me. How does the AUM and trading volume relate to risk of the investor? What do you think will happen if someone invested $100 million into this ETF?

2. I will write a future article comparing all of these ETFs. There is a reason they are cheaper. Some just chase high dividends. You cannot just go by cost and expense ratios. Well, you can but that's investing with your eyes closed if that's the first thing you go for.

3. You can compare performance with the S&P 500 - sure. But I was asking for an intellectual discussion of an alternative ETF based on strategy and methodology. S&P 500 is what pretty much everyone uses a simple benchmark for performance comparison but I don't think any dividend investor looking for a Smart Beta ETF for income would consider the S&P 500 to fit the bill.

4. COWZ is a poor comparison. It is not a 2 factor high dividend yield and high FCF yield ETF. It is a strict FCF yield play that further weights according to FCF yield. SPDV is S&P 500 high dividend yield combined with FCF yield.

[AlanS9]

Looking forward to "the future article comparing all of these ETFs." Thanks for sharing some of your research.

[Brad Kenagy]

1. I know the underlying stocks the fund holds are liquid. I'm talking about the ETF volume itself. AUM and trading volume are a risk for potential investors, and that risk is: Closing Risk. If a fund can't gather assets and make a profit for the company running it, it doesn't make sense to continue to be available. SPDV is not at that point since it is still relatively young, but it is a risk investors need to watch for. A couple years ago I warned readers not to fall in love with TUTT and the ETF closed.

https://seekingalpha.c...

2. Just because a fund is cheaper doesn't mean it is inferior, which you make any fund with a market-cap based weighting system out to be. My point is: If an investor is looking for a dividend ETF and sees one with a lower cost than SPDV and has outperformed the market over a long period, they are more likely to choose that fund over SPDV. This psychology is what SPDV has to overcome and in my opinion I don't think it will.

3. If they didn't want S&P 500 as the benchmark, they could have easily used the S&P 500 dividend aristocrats index as the benchmark instead. NOBL tracks that index.

4. COWZ is a competitor since it also focuses on Free cash flow yield. In addition, there are plenty of two factor products on the market, one that comes to mind is SPHD, which focuses on dividends and low volatility.

[JTLawlor]

re: 1) closing risk is real, and at that point your investment becomes worthless (No residual value). witness GGGG (previous global gold miners ETF)... the reference to the ETF Detahwatch is a good one!!
Good luck and good Investing!!

[Kurtis Hemmerling]

Hmmmm.....

Some questions to ponder - how often are you buying and selling your ETFs? If you can't afford a one-time slippage of 0.15%.....as well the ETF is only a few months old so volume will definitely pick up.

I also don't see your point as regards volume. ETFs are not like stocks. If you were to funnel a lot of money into the ETFs, you wouldn't see prices spike 10% like you would in stocks. All that happens is more ETF units are created. Anything different would begin to create an arbitrage situation. So I disagree with your point on ETF volume.

As for expense ratio - sure if you want an inferior cap-weighted system with lower costs - you can get that. But equal-weighting and sector-balancing takes a little more finesse. The costs are still relatively low. I find that cap-weighting on average reduces annual performance by a 3-4% annually over the long-term. So that's a pretty high price to pay if you ask me.

You cannot compare SPDV to SPY. Two different beasts even if they are trading similarly for the time being. What I would like to see as an intelligent counter-argument on how the ETF is designed - the multi-factor ranking and such - vs. the competition. But talking about picking up nickles in front of a steam-roller....

[res7itzt]

Another thing this author is missing is the fact that at one time, all of those other dividend ETFs were smaller in size, had lower volume and bigger spreads as well. They all had to start somewhere. The chance to get in at the beginning and enjoy the growth that will surely come is a chance that one would be wise to take advantage of.

[Brad Kenagy]

@Kurtis, Thank you for the comments.

1. There is no guarantee that the volume will pick up like you said.

2. -SPYD is equal weighted & Lower expense ratio
-DLN is dividend weighted & has slightly lower expense ratio
-FDVV is dividend weighted & costs the same as SPDV

3. Yes I can compare SPDV to SPY, because on the website for SPDV it specifically lists the S&P 500 index as its benchmark. Not comparing a fund to its listed benchmark is not wise.

4. There is already a fund (COWZ) that targets companies with high free cash flow yield and the total return results since its inception are the same as SPDV: In line performance with the S&P 500.

[Brad Kenagy]

@res7itzt, Sorry but the data shows you are wrong.

SPDV avg vol 1st 3 months: 4,542

In comparison to 1st 3 months for the Dividend ETFs I mentioned.

DVY avg Vol: 373,112
HDV avg Vol: 43,559
VIG avg Vol: 24,345

When these funds were launched, ETFs were not as prevalent either and they still had substantially higher volume than SPDV.