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Could Investing in SDY Benefit Your Portfolio?

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Dec. 1 2015, Updated 1:06 p.m. ET

Healthy return since inception

The SPDR S&P Dividend ETF (SDY) has performed negatively in the market by giving an annual total return of 1.5% to its investors. The total annualized return of SDY since its inception on November 15, 2005, is 7.9%, which is on par with other smart beta ETFs.

AT&T (T), HCP (HCP), Chevron (CVX), Realty Income (O), and National Retail Properties (NNN) are the top five holdings of SDY. The fund seeks to track the performance of the S&P High Yield Dividend Aristocrats Index.

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Portfolio market performance

The above chart gives a pictorial representation of a portfolio of 30% SDY and 70% SPDR S&P 500 ETF (SPY) in comparison with SPY as a whole. The combined portfolio has underperformed in the market by giving a total year-to-date (or YTD) return of 2.6% compared to the market’s YTD return of 3.3%.

Note that increasing the weight of SDY in the portfolio mix has made it more volatile than the market but has also increased the opportunity for gaining high returns. In this way, smart beta funds are a risky bet, but also are a potential excellent source of high returns.

Conclusion

SDY has underperformed in the market for the current year 2015. High-dividend ETFs are the most widely-used type of smart beta ETF in the market. A primary reason for SDY’s underperformance could be its volatile nature and poor performance compared to the market as a whole. Increased volatility makes the ETF more sensitive toward market price movement, similar to high beta stocks. It’s important to understand your risk-taking capability before investing in any such funds.

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