The SPDR S&P Dividend ETF (NYSEARCA:SDY) is a popular choice with investors, as it has accrued an impressive $20.2 billion in assets under management (AUM) since its launch in 2005. But SDY isn’t the only dividend-focused fund within the SPDR series of ETFs. It’s joined by a newer dividend ETF, the SPDR Portfolio S&P 500 Dividend ETF (NYSEARCA:SPYD), which has accumulated $6.9 billion in AUM since launching in 2015.
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The ETFs have slightly different strategies but are both focused on dividends. Which is the better choice for investors, going forward? Despite SDY’s popularity and longevity, the fund looks like an underwhelming choice for investors today. Its newer, smaller SPDR sister fund packs more of a punch when it comes to dividends, and it is significantly cheaper to own. Let’s take a closer look at these two SPDR dividend ETFs.
What Is the SDY ETF’s Strategy?
According to State Street, SDY invests in an index of stocks that “screens for companies that have consistently increased their dividend for at least 20 consecutive years, and weights the stocks by yield.”
State Street explains, “Due to the index screen for 20 years of consecutively raising dividends, stocks included in the Index have both capital growth and dividend income characteristics, as opposed to stocks that are pure yield.”
What Is the SPYD ETF’s Strategy?
Meanwhile, SPYD invests in an index of stocks that “is designed to measure the performance of the top 80 high dividend-yielding companies within the S&P 500 Index.” Like SDY, SPYD also aims for a mix of capital appreciation and yield.
Performance Comparison
As of April 30, SDY has generated a mediocre annualized three-year return of just 4.0%, while SPYD has returned a slightly lower 3.7%. Over the past five years, SDY has produced an annualized return of 7.6%, which is better than SPYD’s five-year annualized return of 5.4%.
These returns aren’t terrible, and investors clearly didn’t lose money with either fund, but they did underperform the broader market. State Street’s own SPDR S&P 500 ETF Trust (NYSEARCA:SPY), the largest and most liquid ETF in today’s market and a good representation of the broader market, recorded a superior annualized three-year return of 7.9% and a far better annualized return of 13.0% as of the same date.
Both ETFs have underperformed the broader market, and SDY has slightly outperformed SPYD. However, SPYD looks like a more compelling investment right now, as we’ll discuss in the following sections.
Dividend Yield – Where the Rubber Meets the Road
The dividend is clearly SDY’s calling card, but the fund currently only yields 2.5%. While this is a better yield than the broader market (for example, SPY yields just 1.3%), it’s not really a compelling yield for income investors, and SPYD easily beats it with a far superior 4.5% yield.
In my view, this leaves SDY in no man’s land, because investors likely aren’t going to choose either fund for its performance over the past few years, but income-focused investors will find SPYD’s significantly higher yield far more enticing.
Fees: Another Area of Clear Separation
The other area where SPYD really sets itself apart and stands out as the superior choice to SDY is when it comes to fees.
SPYD charges a very attractive expense ratio of just 0.07%, while SDY charges a significantly higher 0.35%. This means that an investor putting $10,000 into SPYD will pay just $7 in fees annually, while an investor in SDY will pay $35 in fees on an annual basis.
While SDY’s 0.35% expense ratio isn’t egregious in the big picture, it is five times higher than SDY’s.
The gap between these fees can make a real difference over time. Assuming that each fund returns 5% per year going forward and maintains its current expense ratio, the investor putting $10,000 into SPYD would pay just $90 in fees over a 10-year time frame, while the investor in SDY would pay $443.
Portfolio Comparison
I’ll give SDY credit for the fact that it is diversified. The fund owns 136 stocks, and its top 10 holdings make up just 19.3% of the fund, meaning that SDY does a good job of protecting investors from concentration risk. Below, you’ll find an overview of SDY’s top 10 holdings using TipRanks’ holdings tool.
Meanwhile, SPYD owns fewer stocks but is still fairly diversified, with 77 holdings, and offers similarly low concentration. Its top 10 holdings account for just 15.2% of the fund. Below, you’ll find an overview of SPYD’s top 10 holdings using TipRanks’ holdings tool.
As you can see from the list of top holdings, SDY heavily features stocks from sectors traditionally known for their dividend payouts, such as utilities and consumer staples. The fund’s largest exposures are to these sectors, which both feature weightings of 18.0%.
Meanwhile, SPYD also has a large exposure to utilities (18.6%) but is more heavily exposed to real estate and financials, which have weightings of 27.0% and 20.3% within the fund, respectively.
While there are differences in terms of exposure, the portfolios are similar in that they both focus on segments of the market more known for their dividends than their growth.
Meanwhile, TipRanks’ Smart Score system takes a more favorable view of SPYD’s top 10 holdings than SDY’s. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating.
The Smart Score gives six out of SPYD’s top 10 holdings Outperform-equivalent Smart Scores, while only four of SDY’s top holdings receive these favorable ratings.
Is SDY Stock a Buy, According to Analysts?
Turning to Wall Street, SDY earns a Moderate Buy consensus rating based on 84 Buys, 45 Holds, and six Sell ratings assigned in the past three months. The average SDY stock price target of $141.49 implies 9.2% upside potential from current levels.
Is SPYD Stock a Buy, According to Analysts?
Analysts take a very similar view of SPYD, which earns a Moderate Buy consensus rating based on 62 Buys, 13 Holds, and three Sell ratings assigned in the past three months. The average SPYD stock price target of $44.34 implies 9.2% upside potential from current levels.
The Takeaway: SPYD Is the Clear Winner
While SDY is the larger and more popular fund, it’s hard to see why this is the case beyond perhaps past pedigree or investor inertia. SPYD clearly looks like a superior choice to SDY based on its far superior dividend yield and its significantly lower expense ratio, which is just one-fifth of SDY’s.
While both ETFs have underperformed the broader market in recent years, SPYD still looks like an attractive choice for income-focused investors based on its attractive yield and inexpensive fees, which is more than I can say for SDY.
