Why this outperforming ETF is a good defensive play amid the current cloudy outlook

Published Wed, Apr 20 20221:41 PM EDTUpdated Wed, Apr 20 20227:04 PM EDT

Since the start of 2022, the Invesco S & P 500 High Dividend Low Volatility ETF has outperformed the S & P 500 and those gains could continue amid a murky economic outlook, one analyst thinks. "The bottom line is trend, seasonality, rapid Fed tightening, and the economic cycle do continue to favor SPHD," wrote Ned Davis Research's Matt Bauer in a recent note. "Mind summer weakness and watch for reversals of correlation to the broader market and from potentially overbought conditions as cues to reduce positions or take profits." SPHD's focus is defensive and not overbought, making it a "low volatility defense" for investors looking to ride out the current market volatility, he said. According to Factset, about 40% of SPHD's combined holdings stem from utilities and consumer staples, sectors generally seen as safer bets during periods of rate hikes, rising inflation and a recession. Another roughly 9% come from energy, a sector that is trading up 45% year to date as oil prices seesaw and is currently the strongest performing sector in the S & P 500 by a long shot. Compared to typical ETFs, SPHD is characterized as "smart-beta" because it's based on fundamentals rather than market capitalization or price. It tracks a S & P 500 index that looks for stocks with low volatility and high dividends. Compared to the overall S & P 500, which is down about 6.1% this year and 1.2% this month, SPHD is trading up 9.1% and 4.6%, respectively. SPHD is subject to some seasonality and historically sees its best months in April and May, while June generally underperforms ahead of July rebalancing, Bauer notes. Here are SPHD's top 10 holdings, which make up roughly about a fourth of the fund, according to Factset data: SPHD's largest holding is Williams Companies , followed by Altria Group and Kinder Morgan — which make up about 9.6% of the fund combined, Factset data suggests. Shares of Altria have jumped this year and Goldman Sachs recently upgraded the tobacco company to a buy , noting its stock has more upside than Philip Morris — another top SPHD holding — given the conflict in Ukraine. All of SPHD's top holdings are trading in the green year to date. Telecom giants AT & T and Verizon , which make up the top holdings, also have gained this year. Both historically offer strong dividends although AT & T recently halved its return amid its WarnerMedia spinoff.

A trader works on the floor of the New York Stock Exchange.

Michael Nagle | Xinhua News Agency | Getty Images

Since the start of 2022, the Invesco S&P 500 High Dividend Low Volatility ETF has outperformed the S&P 500 and those gains could continue amid a murky economic outlook, one analyst thinks.