State Street's New Dividend ETF Seeks to Avoid 'Sector Bias'

State Street Global Advisors launched an ETF on Tuesday that offers an alternative dividend strategy to avoid conventional sector weightings that have caused traditional dividend funds to lag the market this year. 

The SPDR Portfolio S&P Sector Neutral Dividend ETF (SPDG) tracks an index of companies in the S&P Composite 1500 that have maintained or raised their dividends for at least seven years in a row and that have higher-than-average dividend yields for their sector. The method aims to ensure that the fund delivers similar returns to a general market fund.  

Some sectors have higher dividends than others, and so there can be vast differences in weightings between yield-weighted funds like State Street’s SPDR Portfolio S&P 500 High Dividend ETF (SPYD) and the broader market. SPYD has 36% of its holdings in utilities and real estate investment trusts, even though those sectors comprise just 5% of the index-based SPDR S&P 500 ETF Trust (SPY). As a result, SPYD lost 5% this year, while SPY returned 17%.  

The index that SPDG tracks has gained 5.6% this year, according to Matthew Bartolini, head of SPDR Americas Research at State Street. 

“We’re striking a balance between seeking income and not having drastically different total return than the market overall,” Bartolini said in an interview. 

Index ETF Biases 

Bartolini says ETF investors should pay attention to the way a fund’s underlying index is constructed, because it can skew a fund’s holdings in unexpected ways. For funds that are trying to maximize dividend yields, this can mean that—even if they are not explicitly a value stock fund or a real estate and financials fund—they can end up with more than 40% of their holdings in those sectors and a strong tilt toward value. 

“Dividend strategies are going to have a value bias, and value is underperforming growth this year,” Bartolini said.