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Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD) is deemed to be one of the best ETFs for investors with low to moderate risk tolerance. However, low volatility doesn’t mean an investor return remains negative or significantly underperforms from the S&P 500 index. SPHD significantly underperformed in the last twelve months, five and ten years compared to the broader market index. I believe there are several options available in the market with the potential to offer better risk-adjusted returns.
US Stock Market Outlook 2024
The US stock market’s bull run intensified in the past six months, pushing the S&P 500 gains to nearly 33% since early 2023. The uptrend was mainly driven by mega-cap tech stocks, but the healthcare and industrial sector fourth quarter results and 2024 outlook helped broaden the growth trend. Furthermore, there are many reasons to believe that the trend is sustainable throughout 2024. For instance, economic growth, interest rates and strong earnings growth power, which are always considered key stock market drivers, are currently supporting the bull-run and lowering the risk of big price correction or bear market.
The US GDP grew by 3.3% in the final quarter of 2023 compared to the expectation for a 2% increase. On the back of robust job market growth and high consumer spending, Fed Atlanta expects 2.9% growth for the first quarter while full year growth is expected to hover around 3%. Despite a high interest rate, the US job market bolstered expectations in January, growing at a double pace with 353000 additions. The unemployment rate hovered around 3.7% for the third consecutive month, up slightly from a 54-year low of 3.4% hit in early 2023. Moreover, the earnings boom is likely to be the biggest catalyst for the stock market and investor confidence, particularly for tech stocks. FactSet data shows that the S&P 500’s earnings are expected to increase by 10% year over year, driven by 20% growth from communication, 16% from information technology and 15% from the healthcare sectors.
Why SPHD is Likely to Underperform in a Bullish Market
SPHD Vs SP500 share price performance (Seeking Alpha)
SPHD appears like a solid ETF with a focus on 53 large-cap dividend stocks from utility, energy, consumer defensive and real estate sectors. Low volatility stocks from these sectors generally perform well in volatile market conditions but underperform in a bullish scenario. For instance, the S&P 500’s price increased around 33% since early 2023 compared to negative performance from SPHD. Moreover, SPHD’s total returns, which includes dividends, came in at just over 2%. SPHD’s lower returns clearly reflect that relying only on a dividend won’t help an investor make healthy returns, particularly in bullish market conditions. As I expect the US stock market to extend the bull trend driven by tech stocks, defensive stocks and ETFs are likely to underperform again in 2024.
SPHD annual performance in 5 years (SPGlobal)
For instance, with a portfolio weight of 20%, SPHD’s performance depends significantly on the utility sector. The utility sector generated an annualized total return of 5% in the past five years and a negative 3% in the last twelve months. The sector performs well during downtrends when demand for safe-haven assets increases. However, the trends have shifted in favour of high-beta stocks in the last year. The sector’s underperformance is also blamed on slow growth because its revenue was flat in 2023 with expectation for low mid-single digit growth in 2024 compared to mid-single-digit growth from the S&P 500 index and high-mid-single digit growth from fast-growing tech companies.
Kinder Morgan (KMI), SPHD’s largest stock holding, generated a total return of only 6% in the last twelve months despite offering a 6.5% dividend yield. Low returns were due to its negative revenue growth. The company’s revenue plunged 12% year over year in the final quarter of 2023 while earnings per share and discounted cash flow declined 10% and 4%, respectively. Dominion Energy (D), which is also SPHD’s top holding from the utility sector, has been facing challenging conditions. Its share price plunged 16% in the last twelve months due to negative revenue and earnings. Its revenue dropped 28% year-over-year in the December quarter. Earnings per share of $0.29 also declined significantly from $1.06 per share in the previous quarter.
On the other hand, its consumer defensive stocks, which account for 15% of its portfolio weight, have struggled in the past twelve months. For instance, Altria (MO) and Philip Morris (PM), its top two largest consumer defensive stock holdings, generated 14% and 7% share price declines in the past twelve months. Like the utility sector, slow financial growth and an investor shift from low volatility stocks to high beta stocks in bullish market conditions negatively impacted their share price performance.
S&P 500 real estate sector performance (SPGlobal)
The performance is mixed from its real estate holdings. For instance, real estate investment trusts like Simon Property (SPG) performed well due to their exposure to the high demand shopping category However, other holdings such as Crown Castle’s (CCI) share price plunged 20% in the last twelve months due to declining demand for Cell Tower REITs. Crown Castle’s revenue and earnings declined in 2023, with expectations for a mid-single-digit decline in 2024. Overall, it appears that the real estate’s pain hasn’t ended in 2024 as the sector is down nearly 4% year-to date.
Where to Look for Better Risk-Adjusted Returns
I believe investors with low to modest risk tolerance can generate healthy returns in a bullish market by investing in dividend growth ETFs like T. Rowe Price Dividend Growth ETF (TDVG) and WisdomTree U.S. Quality Dividend Growth Fund ETF (DGRW). These ETFs track the performance of large-cap dividend stocks from the technology, communication, healthcare and financial sectors. For instance, WisdomTree U.S. Quality Dividend Growth Fund ETF, which is made up of 300 stocks, offers high portfolio diversification, low expense ratio and lofty dividend yield.
DGRW top 10 holdings (Seeking Alpha)
DGRW’s top 10 holdings include Microsoft (MSFT), Apple (AAPL), Broadcom (AVGO), NVIDIA (NVDA), Johnson & Johnson (JNJ), AbbVie (ABBV), The Home Depot (HD), PepsiCo (PEP), Coca-Cola (KO) and Procter & Gamble (PG). All these companies are large caps, with established business models and strong earnings growth potential. For instance, NVIDIA’s share price grew nearly 290% in the last twelve months due to robust demand for its AI-supported chips in data centers. Its $22 billion in the December quarter revenue grew by a whopping 265% year over year. Moreover, the company expects fiscal 2025 first-quarter revenue in the range of $24 billion, compared to analysts’ forecast of $21.9 billion. Similarly, Microsoft, Apple and other tech companies are also likely to show their revenue and earnings growth power in the coming quarters and years. Wall Street expects information technology companies to produce 16.4% earnings growth in 2024. I believe storing earnings growth power enhances their dividend and share price growth potential while lowering the risk factor. Uncertainty about the performance increases when stocks are rising on expectations or speculations. In the case of tech stocks, the uptrend is completely backed by fundamental factors. Therefore, the risk factor is lower even if the market faces any tail event.
Seeking Alpha’s quant system rates DGRW and TDVG a buy with a quant score of 4.02 and 3.76. Whereas, SPHD received a sell rating due to a low score on the momentum and risk factor. It received a negative C grade on the risk factor, which looks significantly poor because it is known for offering low risk. Moreover, DGRW’s assets under management of more than $12 billion and average trading volume of 715K shares is significantly higher than SPHD’s $2.8 billion in assets under management and 674K in average trading volume.
In Conclusion
As the market fundamentals hint at the extension of the bull run with growth stocks expected to be the beneficiary of the uptrend, it might be the right strategy for investors with low to moderate risk tolerance to capitalize on the uptrend by investing in dividend-growth ETFs, such as T. Rowe Price Dividend Growth ETF and WisdomTree U.S. Quality Dividend Growth Fund ETF. The risk factor is low with these ETFs due to their portfolio concentration on established companies with strong earnings growth power. Meanwhile, SPHD could be a good option in bear markets. Its stock holdings’ sluggish growth outlook contributes to concerns over returns for investors in 2024.
