Back in 2011, Invesco launched three ETFs that tracked the S&P 500 like a tortoise (SPLV), a hare (SPHB), and a cheetah (SPHQ). We like smart index strategies to get the benefits of low-cost indexing while having the ability to tilt your portfolio towards a better desired outcome. It all depends on what your goals are as an investor.
For Canadian taxable investors, any financial planner will tell you that if you are seeking dividends, stick to Canadian companies in a taxable account.
The dividend yield on the S&P 500 is currently about 1.25 per cent with the index at all-time highs, and since May 2011, has been a bit over two per cent. If your goal has been higher dividends, SDY produced 3.79 per cent but the worst overall total return (after tax). There is very little growth in the S&P 500 high dividend basket.
If you’re a tortoise, the S&P 500 low volatility index has a 2.53 per cent yield and a similar total return.
In a taxable account, you did a bit better in SPLV given the foreign tax withholding. The high-quality index has done a better job overall with a lower dividend and a higher total return.
The high beta index is the most interesting. It underperformed just about everything until the past few years where far more novice investors have been getting involved and options markets are driving the leverage (gamma) impact on these high volatility names.
| ETF | # Holdings | MER (%) | Yield (%) | Total return (%) |
|---|---|---|---|---|
| SPHB | 102 | 0.25 | 1.36 | 11.98 |
| SPLV | 102 | 0.25 | 2.53 | 10.39 |
| SPHQ | 102 | 0.15 | 1.97 | 13.87 |
| SDY | 157 | 0.35 | 3.79 | 10.58 |
| SPY | 504 | 0.095 | 2.05 | 13.51 |
If you are a non-taxable (registered RSP/TFSA) trader, we have developed some rules of thumb for investors to guide where to go with your index allocations as markets swing.
For most, just stick with the S&P 500 if you can handle the ride. If you can’t handle all the risk, tilt to the low volatility or high dividend indexes when you are cautious (perhaps like now).
You will increase your yield and reduce your downside capture should the market fall. Once the market has a correction of 10 per cent or more (long-term average correction is 13 per cent over past 100 years), it’s typically time to take more risk.
The best upside capture these days comes from the high beta names (SPHB), but that’s not likely a great bet today. For the long-term investor, consider the higher quality index (SPHQ) that gives you a bit of everything and a better longer-term outcome.
Knowing your tools and what they are likely to do in different market environments is better than trying to time markets.
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