SPDV: A Sensible But Risky Dividend ETF

Summary

• SPDV strategy and performance.
• Comparing SPDV with a reference strategy.
• Scanning SPDV with quality metrics.
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This dividend ETF review series aims at evaluating products regarding the relative past performance of their strategies and quality metrics of their current portfolios.

SPDV strategy and performance

The AAM S&P 500 High Dividend Value ETF (NYSEARCA:SPDV) has been tracking the S&P 500 Dividend and Free Cash Flow Yield Index since 11/28/2017. The trailing 12-month yield is 3.2% and the total expense ratio is 0.29%.

As described on AAM website, to be eligible in the index, a company must be in the S&P 500 and have positive dividend yield and free cash flow yield. Eligible companies are ranked on a score based on these two yields, then the top five companies in each GICS sector are included in the index. There may be less than five companies in a sector if less than five have both yields above zero. The index is reconstituted twice a year with constituents in equal weight.

Since inception (11/28/2017), SPDV has lagged the S&P 500 (SPY) by a wide margin, with only half of the benchmark’s annualized total return. SPDV history is short and most dividend ETFs have lagged SPY in the last years. It would be unfair to judge it on only 3 years of return. However, risk metrics are also much worse than for the benchmark (drawdown and volatility measured as standard deviation of monthly returns). This is more concerning.

	Annual Return	Drawdown	Sharpe ratio	Volatility
SPDV	7.82%	-40.42%	0.37	22.34%
SPY	15.23%	-32.05%	0.79	17.72%

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The next chart plots the equity value of $100 invested in SPDV and SPY since SPDV inception, reinvesting dividends.

Comparing SPDV with a reference strategy

In previous articles, I have shown how some factors may help cut the risk in a dividend portfolio: Return on Assets, Piotroski F-score, Altman Z-score.

The next table compares SPDV since 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 sustainable payout ratio. The subset is rebalanced quarterly.

	Annual Return	Drawdown	Sharpe ratio	Volatility
SPDV	7.82%	-40.42%	0.37	22.34%
Dividend & quality subset	11.24%	-33.36%	0.54	19.44%

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

SPDV also lags my dividend quality benchmark, and has worse risk metrics. ETF return is real and this subset is hypothetical.

Scanning SPDV with quality metrics

SPDV has 53 holdings as of writing, 16 of which are risky regarding my metrics. These are companies with at least two red flags: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate for which these metrics are less reliable. Risky stocks weigh about 29% of the portfolio, which is a lot. The position-weighted average ROA, Altman Z-score and Piotroski F-score are significantly worse than S&P 500 values: 2.5% vs. 5.4% , 2.02 vs. 3.47 and 5.0 vs. 5.3, respectively. These metrics point to a below-par portfolio quality.

SPDV vs. VIG

The Vanguard Dividend Appreciation ETF (VIG) is my preferred benchmark for dividend-oriented ETFs (and I hold it). SPDV has a much higher yield (3.2% vs. 1.6%) and also has a higher management fee (0.29% vs. 0.06%). The table below compares them since SPDV inception. VIG is much better in both return and risk.

	Annual Return	Drawdown	Sharpe ratio	Volatility
SPDV	7.82%	-40.42%	0.37	22.34%
VIG	14.40%	-29.58%	0.82	15.66%

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Conclusion

SPDV holds a portfolio of 53 blue chips picked by a strategy selecting stocks on dividend yield and free cash flow yield, offering a diversified sector exposure and balancing holdings in equal weight. It makes a lot of sense. However, the result doesn’t look so great. It is a high-risk product both from a technical point of view (historical volatility and drawdowns are significantly larger than the benchmark) and from a fundamental point of view (current quality metrics are below the benchmark). It may be too early to assess SPDV with only three years of historical data, but performance since inception is disappointing compared to lower yield ETFs like VIG (review here), RDVY (review) and DGRW (review), some of its competitors in the dividend ETF arena.

For transparency, my equity investments are split between a passive ETF allocation and an actively managed stock portfolio, whose positions and trades are disclosed in Quantitative Risk & Value.

Analyst’s Disclosure: I am/we are long VIG. 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.