The biggest investment mistakes you make are likely to come from situations where you don't fully understand the asset you are buying. That's actually easy to do in the exchange-traded fund (ETF) space, because the logic behind many of the ETFs out there is complex and even convoluted. But that's not the case with the SPDR Portfolio S&P 500 High Dividend ETF (SPYD -0.25%).
Here's why the SPDR fund could be the best dividend ETF for you -- and why some investors might not want to buy it.
What does the SPDR Portfolio S&P 500 High Dividend ETF do?
The SPDR Portfolio S&P 500 High Dividend ETF has the words "high dividend" in its name. It also includes "S&P 500" in the mix. This is a shockingly descriptive name, given that the ETF simply buys the 80 highest-yielding stocks from the S&P 500 index and weights them equally in the portfolio. That's very straightforward and easy to understand compared to other dividend ETFs.
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For example, some dividend ETFs exclude certain types of dividend-paying stocks (real estate investment trusts are frequently snubbed) or incorporate other metrics into the selection process (dividend increases and quality measures are factors that get used a lot). Although there are benefits to be had from complicating the investment approach, that doesn't necessarily make more complicated approaches better. More to the point, some investors will prefer different tactics from others, so having a variety of investment tactics to choose from is a net benefit to all investors.
When it comes to the SPDR Portfolio S&P 500 High Dividend ETF, there's nothing wrong with collecting an attractive yield from an easy-to-understand ETF. The S&P 500 is a vetted index filled with large, economically important companies. And when you buy this SPDR fund, you are getting the highest-yielding names from an elite collection of stocks. The yield is roughly 4.4%, which compares very favorably to the 1.3% or so dividend yield of the S&P 500 index.
There are some problems with the SPDR Portfolio S&P 500 High Dividend ETF
So simple isn't bad, but it does come with some minor issues. The most notable of these is going to show up on the diversification front, or the lack thereof in this case. Some sectors of the market just tend to have higher yields than others. That can be structural (REITs are specifically designed to pass income on to investors), or just a historical norm (utilities simply tend to pay notable dividends). Regardless of the reason, the SPDR Portfolio S&P 500 High Dividend ETF is highly concentrated in just three industries.
Perhaps not surprisingly, real estate is the largest component of the fund at 27% of assets. That's followed fairly closely by utilities at 20%, and not too far behind that is finance at 18%. No other sector makes up more than 10% of the portfolio. But some simple math will tell you that the three sectors noted above make up nearly two-thirds of the portfolio, which is a pretty material amount of sector concentration. They all tend to be interest rate sensitive, too, so they will probably move in similar ways.
That's not the end of the world, per se, but it is something you'll want to think about before you buy this particular SPDR ETF. That concentration suggests it probably shouldn't be the only ETF you own. You might want to pair it with a broader index-based ETF (perhaps one that tracks the S&P 500) or a dividend ETF that takes a more nuanced approach to the stock selection process just to broaden out your diversification. Or, to put it a different way, consider the SPDR Portfolio S&P 500 High Dividend ETF a team player and not the star of your portfolio.
A good choice, but maybe not the perfect choice
The SPDR Portfolio S&P 500 High Dividend ETF will be a good fit for dividend investors who like to keep things simple. But the simple approach here leads to other complications, and risks, that you'll want to consider on a larger portfolio level. You might decide that the SPDR Portfolio S&P 500 High Dividend ETF has a place in your portfolio, but that it needs to be paired with other ETFs so you don't end up sideswiped by a market environment that negatively affects real estate, utilities, and finance companies all at the same time.
