The Hidden Risks of High-Yield ETFs: Why Dividend Sustainability is Under Threat in 2025

The allure of high-yield ETFs has long captivated income-focused investors, but 2025 marks a turning point in their risk profile. As economic headwinds gather and interest rates remain elevated, the financial sustainability of these funds is coming under scrutiny. The SPDR Portfolio S&P 500 High Dividend ETF (SPYD), a flagship product in this space, exemplifies the growing tension between yield and resilience. With a portfolio weighted toward real estate and utilities—sectors highly sensitive to rate hikes—SPYD’s 42% sector concentration exposes it to regulatory and interest rate volatility [1]. This structure, while attractive for its 2.8% yield, prioritizes dividend output over financial quality, leaving it vulnerable to value traps [1].

The problem lies in SPYD’s methodology: it selects the top 80 high-yield stocks in the S&P 500 without screening for profitability or cash flow [2]. This approach creates a portfolio where companies like AT&T and Altria dominate, but their dividend sustainability relies on debt-fueled payouts rather than organic earnings growth [4]. A 2023 study revealed that 70% of institutional investors overallocated to such strategies during rate-cutting cycles, only to face underperformance and volatility when markets reversed [4]. The current environment, with a potential 2026 recession looming, amplifies these risks. Companies with weak earnings or high leverage—common in SPYD’s holdings—are likely to face dividend cuts or defaults as cash flow pressures mount [3].

Contrast this with quality dividend ETFs like the Schwab U.S. Dividend Equity ETF (SCHD) and Vanguard Dividend Appreciation ETF (VIG). These funds employ rigorous screens for payout ratios, dividend growth rates, and profitability, resulting in portfolios with 11.59% and 10.2% five-year dividend growth CAGRs, respectively [4]. For instance, ConocoPhillips, a top holding in SCHD, has increased its dividend by 34% in one year alone, reflecting its strong cash flow and balance sheet [1]. Such strategies prioritize resilience over yield, aligning with macroeconomic realities.

The data is clear: high-yield ETFs like SPYD underperform in downturns. Year-to-date through June 2025, SPYD returned -2.13%, lagging behind SCHD’s -3.35% and VIG’s -1.8% [1]. This underperformance stems from SPYD’s equal weighting, which overexposes the fund to smaller, volatile names like Hasbro and APA Corporation [1]. Meanwhile, SCHD and VIG’s sector diversification and quality screens buffer them against market stress.

Investors must now weigh the trade-off between yield and sustainability. While SPYD’s 0.07% expense ratio is appealing, its lack of quality controls makes it a poor fit for a decelerating economy [2]. Diversifying into ETFs that emphasize dividend growth and financial health—such as SCHD or VIG—offers a more prudent path. These funds not only protect against cash flow risks but also position investors to capitalize on long-term value creation.

Source:
[1] Balancing Act: SPYD's High Yield Comes at a Cost for ... [https://www.ainvest.com/news/balancing-act-spyd-high-yield-cost-portfolio-resilience-2506/]
[2] SPYD: SPDR® Portfolio S&P 500® High Dividend ETF [https://www.ssga.com/us/en/intermediary/etfs/spdr-portfolio-sp-500-high-dividend-etf-spyd]
[3] High-Yield ETFs in Cooling Market: Proceed With Caution [https://www.etf.com/sections/advisor-center/high-yield-dividend-etfs-market-risk-2025]
[4] FDVV vs. SCHD: Which Dividend ETF is the Smartest Buy in 2025? [https://www.tradingnews.com/news/fdvv-schd-which-dividend-etf-wins-on-growth-yield-and-value-in-2025]