SPDV: A Good Idea In Theory, But Reality Is Complicated (NYSEARCA:SPDV)

This dividend ETF article series aims at evaluating products regarding the relative past performance of their strategies and the quality metrics of their current portfolios. As holdings and their weights change over time, I may update reviews, usually no more than once a year.

SPDV strategy and portfolio

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. It has 55 holdings (plus cash), a distribution yield of 3.12%, and a total expense ratio of 0.29%.

As described on the AAM website, to be eligible for the index, a company must be in the S&P 500 and have a 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.

The fund invests mostly in U.S. companies (98.4% of asset value) of the mid-cap (52%) and large-cap (48%) segments.

By index definition, sectors are in equal weight after every rebalancing, except when less than 5 companies in a sector pass the selection rules. Due to price action, as of writing, the heaviest sector is energy (10.2%) and the lightest one is financials (7.03%). The next chart plots relative sector weights in SPDV and the S&P 500 (SPY).

The top 10 holdings, listed in the next table with some fundamental ratios, represent about 22% of asset value. The largest holding weights 2.2%, so risks related to individual stocks are low.

Historical performance

Since inception in November 2017, SPDV has underperformed SPY by 4.36 percentage points in annualized return (see next table). Moreover, SPDV has a higher risk measured in drawdown and volatility (standard deviation of monthly returns). SPDV has also lagged popular dividend-oriented ETFs: the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation ETF (VIG).

Data calculated with Portfolio123

The next chart plots the equity value of $100 invested in SPDV and SPY since SPDV’s inception, with all dividends reinvested.

Comparing SPDV with a reference strategy

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

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 annually to make it comparable to a passive index.

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

SPDV underperforms this dividend quality benchmark by a wide margin. However, ETF performance is real and the subset is hypothetical. My core portfolio holds 14 stocks selected in this subset (more info at the end of this post).

Scanning the current portfolio

SPDV has a portfolio of 55 holdings. It is significantly cheaper than the S&P 500 regarding the usual valuation ratios, as reported in the next table.

I have scanned SPDV holdings with the quality metrics described in the previous paragraph. I consider that risky stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate where these metrics are less relevant. With these assumptions, 8 stocks out of 55 are risky and they weigh 15% of asset value. It is not very good, but still acceptable.

Based on my calculation, aggregate Altman Z-score Piotroski F-score and return on assets are below SPY’s aggregate values. These metrics point to a portfolio quality slightly inferior than the benchmark.

Takeaway

SPDV holds a portfolio with a maximum of 55 large and mid-cap stocks picked by a strategy based on dividend and free cash flow. It offers a balanced sector exposure and constituents are held in equal weight. The strategy makes a lot of sense: dividend yield, free cash flow, and equal weightings are three well-known positive biases.

However, the result doesn’t look so great. SPDV 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 four years of historical data, but performance since inception is disappointing compared to SCHD (in the same yield range) or VIG (dividend growth ETF in a lower yield range).

SPDV has only one star at Morningstar rating, which I find a bit harsh. At least, SPDV has not suffered capital decay like high yield ETFs like Global X Super Dividend U.S. ETF (DIV) (reviewed here). For transparency, my equity investments are split between a passive ETF allocation (SPDV is not part of it) and an actively managed stock portfolio, whose positions and trades are disclosed in Quantitative Risk & Value.