Investors looking for a high-yield exchange-traded fund (ETF) will probably stumble across the SPDR Portfolio S&P 500 High Dividend ETF (SPYD 0.85%) fairly quickly while doing research. After all, it has a yield of 4.4%, which is far higher than the yield offered by the S&P 500 index.
As the name of this ETF implies, high dividend yields are a key goal -- but don't jump in just yet. There are a few things you'll want to know before buying.
The SPDR Portfolio S&P 500 High Dividend ETF isn't very selective
There's only one important criterion for getting into the SPDR Portfolio S&P 500 High Dividend ETF -- high yield. The selection starts with the constituents of the S&P 500 index, which means that all of the companies being considered for SPDR Portfolio S&P 500 High Dividend ETF are large and economically important U.S. companies. The S&P 500 is a hand-selected index in that regard but doesn't necessarily focus on company quality or recent company performance.
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In other words, the SPDR Portfolio S&P 500 High Dividend ETF's focus on yield will lead to a high yield, but it will also likely mean buying into companies that are probably struggling financially. Not all of the stocks in the fund will be in this situation, but there will probably be a good number in the portfolio that fall into the value camp or might even be turnaround plays. Because there are no quality screens applied, there's nothing to be done about this fact.
The SPDR Portfolio S&P 500 High Dividend ETF is heavy in some sectors
Another fact that comes along with picking just the 80 highest-yielding S&P 500 stocks is that the SPDR Portfolio S&P 500 High Dividend ETF will end up with a less diversified portfolio. Why? Because there are just some sectors in the stock market that tend to have higher yields all of the time.
Two prominent examples of this would be real estate investment trusts (REITs) and utilities. REITs are specifically designed to pass income on to investors in a tax-advantaged manner, and utilities have a long history of paying substantial dividends.
If you look at the overall portfolio, the concentration issue becomes apparent. Real estate is the largest sector exposure at 27% of assets. Next up is finance at 20%, followed closely by utilities at 18%. Add up those three numbers and you get a fairly large 66% or so of the portfolio in just three sectors, which makes this a rather concentrated ETF.
If you don't go in knowing that fact, you might end up surprised by the ETF's performance. For example, two of the three largest sectors (REITs and utilities) tend to be impacted in the same way (negatively) when interest rates rise.
SPDR Portfolio S&P 500 High Dividend ETF is equally weighted
The last big factor to consider is the weighting given to each of the 80 stocks in this high-dividend ETF. While the S&P 500 is market-cap weighted -- which generally means the largest companies will have the biggest impact on the index's performance -- the SPDR Portfolio S&P 500 High Dividend ETF is equally weighted. There are some benefits to this -- each company will have the same opportunity to influence the ETF's performance.
However, that means both good and bad performers are having the same impact. This shouldn't be a deal-breaker like a lack of diversification might be, but equally weighting a portfolio changes the performance dynamics materially. Sure, the SPDR Portfolio S&P 500 High Dividend ETF owns stocks like Altria and AT&T that are huge and well-known, but they're no more important to performance than companies you may not know, like Franklin Resources and Federal Realty.
Not a bad ETF, but understanding it before buying is essential
There's nothing inherently wrong with the SPDR Portfolio S&P 500 High Dividend ETF. It's a very simple ETF to understand and delivers on its goal of providing a high dividend yield. The problem is that there are consequences that come along with the ETF's simplicity. You need to understand those nuances before you buy it, or you might end up unhappy with your purchase.
