SPHD: A Low Volatility ETF Is Poised To Offer Solid Returns #NewsETFs

Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD) now appears fundamentally sound because of broadening earnings growth trends, cheap valuations and the potential rate cuts. Shares have also started responding to improving fundamentals, a trend that is likely to continue over the following quarters. As tech stocks forward valuations increase the risk of a tech selloff, SPHD could be a beneficiary of the rotation out of tech stocks due to its low volatility and cheap valuations. Therefore, I upgraded my rating from hold to buy on SPHD.

Fundamentals for Low Volatility Sectors are Improving

In the second quarter, the S&P 500 experienced a robust earnings growth of 11%, topping expectations for a 9% increase due to high double-digit earnings growth from low-volatility sectors, such as utilities, healthcare and financials. Other dividend rich sectors, including real estate, consumer defensive and communication, also delivered a mid single-digit percentage growth. The second quarter earnings marked the largest shift in earnings growth trend since the beginning of 2023. Excluding industrials and utilities, most of the less volatile sectors struggled to generate mid single-digit to positive earnings growth last year. Meanwhile, the S&P 500’s earnings and price performance was mainly driven by technology, communication and consumer cyclical stocks. Indeed, the Magnificent-7 stocks contributed nearly half of the S&P 500 price and earnings performance last year and in the first quarter of 2024.

Therefore, the surprise change in earnings growth trend has also begun reflected in Invesco S&P 500 High Dividend Low Volatility ETF’s share price. Its price rallied almost 15% year to date, surpassing many top-performing value ETFs. Moreover, the uptrend is expected to continue because the earnings growth trend for the low volatility sectors is expected to last for a longer time. The utilities, financials and consumer discretionary sectors are expected to report a double-digit growth while healthcare, real estate and industrial sectors’ earnings are likely to be in a mid single-digit range according to FactSet data.

Besides the earnings growth, other fundamental factors are also backing the share price trend. For instance, the US GDP growth of 2.8% in the second quarter was significantly higher than expectations for a 2% increase. Moreover, declining inflation and increasing unemployment rate set the path for a first cut in the September meeting. The market is currently anticipating a high probability of a 0.25% rate cut, while prospects for a 0.50% rate cut is also on the cards to avoid the risk of recession.

The interest rate cut is likely to bring growth for dividend-heavy sectors. For instance, rate cuts are likely to lift the pressure on the real estate sector. A low-interest rate environment increases demand for mortgages and other construction activities. Similarly, financials stocks are also likely to benefit because low rates are expected to increase demand for loans and lowers the risk of bad debts. Last year, banks and consumer financial services companies reported billions of dollars in provisions for credit losses due to high rates. Healthcare, consumer staples and consumer discretionary companies also prosper in a low inflation and interest rate environment.

SPHD is a Solid ETF to Capitalize on Trend

Invesco S&P 500 High Dividend Low Volatility ETF could be one of the best options for investors due to multiple factors, including its targeted exposure to low volatility dividend-paying stocks from all eleven sectors. The targeted exposure enables the ETF to pick a small number of best low volatility dividend-paying stocks from each sector. Its portfolio is composed of 51 stocks with utilities accounting for 20% of the entire portfolio while consumer staples, real estate, healthcare, energy and communication representing 19%, 14%, 13%, 9.5% and 8.5% of the portfolio. Although the ETF offers a targeted exposure to a few stocks from each sector, the risk factor is further reduced by lowering a concentration level in each stock. Its top 10 holdings account for only 25% of the overall portfolio, while the rest of 40 stocks represent 75%. The largest holding is around 3% of its portfolio weight.

Its top 10 holdings include prominent names from various sectors. For example, Altria Group (MO), a defensive consumer staples company, has a long history of offering healthy cash and steady price returns to shareholders. The company has recently lifted its quarterly dividend by 4.1% to $1.02 per share, marking the 59th dividend increase. In addition, Altria’s year to date shares price rally of 30% outperformed the S&P 500. The share price of Crown Castles (CCI), a real estate company, bounced back sharply last month, soaring more than 10% amid hopes about the potential rate cut to begin in September. In addition, it’s better than expected second quarter results contributed to investor sentiment. Similarly, shares of VICI Properties (VICI) and Realty Income Corporation (O) rebounded last month. VICI Properties topped the second quarter estimate and raised its full-year outlook, while Realty Income benefited from higher occupancy rate.

SPHD’s top holdings in the communication services sector are Verizon (VZ) and AT&T (T). Both communication companies continue to generate solid returns for the shareholders. AT&T’s share price rallied 17% year to date, while Verizon’s stock price surged 9.5%. Moreover, both companies offer high dividend yields. At present, AT&T and Verizon’s dividend yield is around 5.5% and 6.5%, respectively.

SPHD’s top healthcare companies, Bristol-Myers Squibb (BMY) and Pfizer (PFE), also upped their full-year outlook. Bristol-Myers lifted its earnings per share guidance to the range of $0.60 to $0.90 from the previous estimate of $0.40 to $0.70. Pfizer increased its full-year adjusted earnings per share guidance by $0.30 per share at a mid-point to the range of $2.45 to $2.65. Overall, the financial performance across low volatility sectors improved in the recent quarter, with expectations for higher than previously expected growth for the full-year. I believe earnings growth could play a key role in strengthening dividends and backing the share price performance.

On the other hand, SPHD is also likely to benefit from its cheap valuations and the potential rotation out of tech stocks. SPHD’s current share price appears undervalued because of robust earnings growth outlook and share price underperformance in the previous quarters. This is reflected in its cheap forward price to earnings ratio of 13.39x, compared to the S&P 500’s 21x. Meanwhile, forward PE of the tech sector, which is a key driver of the bull run, is currently around 29x, a level last seen a few months before the 2022 bear market. As the risk of correction increases for tech stocks, SPHD could be a solid option for rotation because of its low valuation and earnings growth power.

Quant Rating

With a buy rating and a quant score of 4.42, Invesco S&P 500 High Dividend Low Volatility ETF earned a buy rating and is ranked at the top of the list in its sub asset class based on Seeking Alpha quantitative analysis. Its momentum score improved significantly in the past months due to increased investor confidence in the earnings growth outlook. Moreover, earnings growth improvement is also likely to strengthen a dividend factor. The negative A grade on a liquidity factor indicates robust trading volume and higher assets under management.

In Conclusion

SPHD’s share price momentum and cash returns are likely to improve in the following quarters because of its holdings earnings growth power, rate cuts and macroeconomic stability. Cheap valuations are also likely to contribute to its share price returns, making it a solid option for rotation out of tech stocks. Its portfolio structure also appears sound, to benefit from improving fundamentals while lowering the risk of selloff. Therefore, SPHD could be an attractive investment option for low to modest risk tolerance investors.