ETFs
Is the SPDR Portfolio S&P 500 High Dividend ETF the best dividend ETF for you?
If you like to keep things simple with your ETFs, then the SPDR Portfolio S&P 500 High Dividend ETF might be for you.
The biggest investing mistakes you make will likely come from situations where you don’t fully understand the asset you’re purchasing. This is actually easy to do in the exchange-traded fund (ETF) space, because the logic behind many ETFs is complex and even convoluted. But this is not the case of SPDR Portfolio S&P 500 High Dividend ETF (SPY -0.12%).
Here’s why the SPDR fund might be the best dividend ETF for you — and why some investors might not want to buy it.
What is the SPDR Portfolio S&P 500 High Dividend ETF used for?
The SPDR Portfolio S&P 500 High Dividend ETF has the words “high dividends” in its name. It also includes the “S&P 500” in the mix. This is a surprisingly descriptive name, given that the ETF simply buys the 80 most profitable stocks on the market. S&P500 hint and weights them equally in the portfolio. It is very simple and easy to understand compared to other dividend ETFs.
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For example, some dividends AND F exclude certain types of dividend-paying stocks (real estate investment trusts are frequently snubbed) or incorporate other parameters into the selection process (dividend increases and quality metrics are widely used factors). While there are benefits to complicating the investment approach, that doesn’t necessarily make more complex approaches better. Specifically, some investors will prefer different tactics than 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 getting an attractive yield from an easy-to-understand ETF. The S&P 500 is an audited index filled with large, economically important companies. And when you buy this SPDR fund, you get the best-performing names from a collection of elite stocks. The yield is around 4.4%, which compares very favorably to around 1.3%. 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 have some minor issues. The most notable of these will appear on the diversification front, or lack thereof in this case. Some areas of the market simply tend to have higher returns than others. This may be structural (REITs are specifically designed to pass income to investors) or simply a historical norm (utilities simply tend to pay notable dividends). Whatever the reason, the SPDR Portfolio S&P 500 High Dividend ETF is heavily concentrated in just three sectors.
Perhaps unsurprisingly, real estate is the fund’s largest component, at 27% of assets. Next comes utilities with 20%, followed closely by finance with 18%. No other sector represents more than 10% of the portfolio. But some simple math will tell you that the three sectors mentioned above make up almost two-thirds of the portfolio, which represents a pretty significant sector concentration. They all tend to be equally sensitive to interest rates, so they will likely move in the same way.
This isn’t the end of the world per se, but it’s something you’ll want to think about before purchasing this particular SPDR ETF. This concentration suggests that this probably shouldn’t be the only ETF you own. You may want to pair it with a broader index 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 your diversification. Or, to put it another way, think of the SPDR Portfolio S&P 500 High Dividend ETF as a team player, not the star of your portfolio.
A good choice, but perhaps not the perfect choice
The SPDR Portfolio S&P 500 High Dividend ETF will suit dividend investors who like to keep things simple. But the simple approach here brings with it other complications and risks that will need to be considered at a broader portfolio level. You might decide that the SPDR Portfolio S&P 500 High Dividend ETF has a place in your portfolio, but that it should be paired with other ETFs so that you don’t get swept up in a market environment that negatively affects real estate, utilities and financial companies at the same time.