Invesco S&P500 High Dividend Low Volatility ETF: Undervalued With Pros, Cons

Selloffs are never enjoyable for investors. Even though most investors have long-term core holdings, nobody likes to lose money. Still, short-term volatility usually creates good longer-term opportunities for investors who look at the big picture.

The market has sold off hard over the last several weeks, with the S&P 500 (SPY) and most major indexes down nearly 10% since the beginning of May.

Funds indexed to the S&P 500, such as the Invesco high dividend low volatility ETF (NYSEARCA:SPHD), have obviously sold-off hard in recent weeks as well.

The S&P 500 has sold off nearly 12% over the last month, and volatility levels in most of the major indexes have predictably spiked as well.

With markets having sold-off hard over the last several weeks and volatility levels rising, there are new opportunities as well.

One solid current option for dividend and income investors right now is the Invesco S&P 500 high dividend, low volatility ETF. This fund has sold off just over 10% during the recent market decline, and this ETF looks undervalued at current prices using several metrics.

The Invesco S&P 500 exchange-traded fund invests 90% of the fund’s assets in the highest yielding, lowest volatility stocks within the S&P. This fund currently has $3.6 billion in assets under management. The expense ratio is .3%, which is low for the industry. The current yield is 3.65%, pays monthly distributions, and the fund has seen dividend growth of 24% since 2012, which is below the industry standard. This fund has actually had a standard deviation of 14.22% compared to the S&P 500 standard deviation of 13.21%. The fund originated in October of 2012. The fund’s allocation is 46% large-cap value, 17% large-cap blend, 30% mid-cap value, and 6% mid-cap blend.

The holdings of the fund are 21% utilities, 18% consumer defensives, 13% health care, 12% real estate, 9.4% energy, 6.22% communications, 6.07% financials, 5.74% consumer cyclicals, 3.13% industrials, 2.53% technology, and 2.02% basic materials. The fund’s four largest holdings are Williams companies (WMB), Altria (MO), Kinder Morgan Inc Class P (KMI), and Chevron (CVX).

What’s most unique about this Invesco dividend fund is that this ETF has a good balance between more cyclical companies that should offer inflation-adjusted income and total returns, and more traditional defensive companies. This fund has nearly 25% of the holdings in the financial, energy, and consumer cyclical sectors. These positions obviously are likely to outperform in an inflationary environment, such as the one we are seeing now. The ETF is still overweight traditional defensive sectors that tend to be less volatile, such as the utility and consumer defensive sectors.

Inflation continues to be a major issue, with price increases trending at 5% for much of the last year, and inflation rates coming in at a 40-year high just last month.

With consumer prices likely to stay elevated for some time, investors seeking to get inflation adjusted income and total returns without investing in equities that are excessively volatile will need to find funds that have a unique mix and balance. This Invesco dividend fund has a nice mix with 25% of the fund’s assets invested in cyclical companies, and 75% of the fund’s assets invested in more traditional defensive sectors. The fund invests in 50 securities and rebalances twice a year.

Even though this fund currently yields 3.65%, below the prevailing inflation rate of nearly 5%, many of the companies in this fund are likely to raise dividend payouts significantly this year. Specifically, three of the fund’s biggest holdings; Williams, Chevron, and Kinder-Morgan, are all likely to raise their respective dividends near-record amounts. Chevron has already raised the company’s dividend twice in the last 15 months, and oil prices have of course moved higher over the last year.

Still, all investments come with pros and cons, and this Invesco fund has several drawbacks. The fund has underperformed the major indexes and most leading dividend funds since the ETF’s inception in 2012 primarily because the managers of this fund allocate assets to lower volatility companies and sectors rather than simply seeking value. The semiannual turnover rate also creates more risk as well, since the fund makes significant changes to capital allocation on a consistent basis. This Invesco ETF is also slightly underweighted inflation, since only 25% of the fund’s assets are in sectors such as energy, consumer cyclical, and financials. Finally, this fund has at times still been more volatile than the S&P 500, as the standard deviation data shows.

Volatility almost always comes when asset classes sell off. Still, fear usually creates opportunities, and the recent market decline has resulted in stocks and funds yielding significantly more than these investments were paying just several weeks ago. While predicting short-term market moves is often challenging, investors seeking stable income and solid long-term profits should look at the recent selloff as a good long-term buying opportunity in selective parts of the market. Even though inflation and a slow economy are obvious current concerns, consumer spending levels remain high, and unemployment levels remain reasonably low. The fundamentals of the US economy remain strong.