One of the biggest mistakes factor investors make is forgetting that a good factor isn’t necessarily the right factor for every investor. The ideal portfolio factor tilts depends on your objectives, risk tolerance, and time horizon.
Take small-cap value, for example. It has historically been one of the strongest long-term factors for outperforming the market, but it has also endured decade-long stretches of underperformance. A 30-year-old investor with decades until retirement may be perfectly comfortable waiting for that premium to reappear. Someone already retired and making regular withdrawals has far less flexibility, particularly when sequence-of-returns risk comes into play.
For retirees, two MSCI factors stand out as especially practical: low volatility and high dividends. Low-volatility stocks have historically experienced smaller price swings than the broader market, while high-dividend stocks provide a larger portion of total return through cash distributions. Combined, they can produce an investment experience that is generally less volatile while generating more income, an attractive combination for investors relying on their portfolios to help fund retirement.
Fortunately, you don’t have to build this portfolio yourself. The Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) combines both factors into a single ETF, offering retirees a straightforward way to pursue higher income with less day-to-day volatility than the broader S&P 500.
What is SPHD?
Rather than simply selecting the least volatile stocks, SPHD first screens the S&P 500 for the highest-yielding companies. From that universe, it then selects the 50 stocks with the lowest trailing 12-month volatility, while applying limits to sector and individual stocks
SPHD is first and foremost a high-dividend strategy, with low volatility serving as a secondary screen. Starting with the highest-yielding companies and then filtering for lower volatility helps weed out some potential yield traps, companies whose unusually high dividend yields stem from collapsing share prices and deteriorating fundamentals rather than healthy cash generation.
The portfolio is reconstituted semi-annually in January and July. Although the holdings remain relatively stable between rebalances, dividend yields and historical volatility change over time, requiring periodic updates to keep the index aligned with its objective.
The strategy naturally produces a relatively high 4.30% 30-day SEC yield while paying distributions monthly. SPHD charges a reasonable 0.30% expense ratio and currently trades at an attractive forward price-to-earnings ratio of just 13.57 times as of June 30, reflecting its significant value factor tilt.
Has SPHD Actually Reduced Risk?
The answer depends on how you define risk. If risk is measured by beta, SPHD has clearly delivered on its objective. Beta measures how sensitive an investment is to movements in the broader market, with the S&P 500 assigned a beta of 1.00. According to Yahoo Finance, SPHD currently has a five-year monthly beta of just 0.47, meaning it has historically moved less than half as much.
If, however, you define risk by maximum drawdowns during market crashes, the picture is less encouraging. During major market declines, including the March 2020 COVID-19 crash, SPHD declined by almost as much as the broader S&P 500.
That outcome shouldn’t be surprising. Despite its low-volatility screen, SPHD remains a 100% equity portfolio. During severe market selloffs, correlations between stocks often rise sharply, reducing many of the diversification benefits investors expect during calmer periods.
For retirees, I think SPHD works best as one tool rather than a complete solution. The combination of higher income, a value tilt, and lower day-to-day volatility can make it an attractive core equity holding. However, it shouldn’t replace other risk-management tools such as high-quality bonds, cash reserves, or hedging strategies for investors seeking meaningful downside protection.
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