Balancing Act: SPYD's High Yield Comes at a Cost for Portfolio Resilience

The SPDR® Portfolio S&P 500® High Dividend ETF (SPYD) has long been a go-to choice for income-seeking investors, offering a trailing 12-month yield of over 4.5% as of June 2025. However, its allure as a high-yield vehicle masks a critical trade-off: its heavy concentration in real estate and utilities sectors introduces vulnerabilities that could jeopardize portfolio resilience during market turbulence. While SPYD's dividend strategy is undeniably alluring, investors must weigh its sector risks against alternatives like the Vanguard Value ETF (VTV) and the Schwab U.S. Dividend Equity ETF (SCHD), which prioritize quality screens and diversification.
The Double-Edged Sword of SPYD's Sector Allocation
SPYD's top holdings are dominated by real estate and utilities companies, which together account for 42% of its portfolio (23.71% in real estate and 18.55% in utilities). This concentration stems from its mandate to track the S&P 500 High Dividend Index, which selects the top 80 highest-dividend-paying stocks in the S&P 500. While this strategy boosts income, it creates exposure to sectors that are highly sensitive to interest rates and regulatory shifts.
For instance, real estate investment trusts (REITs) and utilities companies often rely on low borrowing costs to maintain dividend payouts. A would likely compress their valuations, as seen during periods like 2022–2023. Additionally, the equal-weight nature of its index—though not explicitly stated—may lead to overexposure to companies that qualify as “value traps,” where dividends are sustained only through debt or asset sales rather than sustainable earnings.
Risk Metrics: SPYD's Volatility vs. Peers
Despite its defensive sector tilt, SPYD's risk profile is less benign than it appears. Its beta of 0.82 and three-year standard deviation of 17.06% suggest it is more volatile than broad market benchmarks like the S&P 500 (beta = 1.0). Compare this to the 0.78 beta and 15.05% standard deviation of SCHD, which uses quality screens to exclude companies with weak balance sheets or inconsistent dividends.
VTV, with a beta of 0.70 and a three-year standard deviation of 15.47%, further underscores the advantage of diversified value strategies. Both funds emphasize large-cap stocks but avoid SPYD's sector concentration, instead spreading risks across sectors like financials, healthcare, and industrials.
The Case for Quality Screens and Diversification
SPYD's reliance on high-dividend screens alone leaves it exposed to companies with declining fundamentals. For example, its top holdings include AT&T (1.64%) and Eversource Energy (1.54%), which face regulatory and operational challenges. In contrast, SCHD's focus on companies with a history of consistent dividend growth (e.g., Coca-Cola, Procter & Gamble) and VTV's emphasis on book-to-price ratios (a measure of value) provide better safeguards against overvalued or struggling firms.
The expense ratio also matters: VTV's 0.04% fee and SCHD's 0.06% fee undercut SPYD's 0.07%, compounding long-term returns. For investors prioritizing capital preservation, these funds' lower costs and risk metrics offer a compelling edge.
Performance in Context
Year-to-date through June 2025, SPYD has underperformed its peers, with a -2.13% return compared to SCHD's -3.35% and VTV's -1.8%. While this may reflect sector-specific headwinds (e.g., utilities underperforming due to rising rates), it highlights the risks of concentrated exposure. Over longer periods, SPYD's higher yield hasn't translated to superior returns: its 11.32% trailing one-year return trails VTV's 12.16% one-year return and SCHD's 7.97%.

Investment Strategy: Prioritize Quality and Diversification
Investors seeking dividend income should ask themselves: Is the extra yield from SPYD worth the sector-specific risk? For many, the answer will be no. A safer approach is to:
- Diversify with SCHD or VTV: Their broader sector allocations (e.g., SCHD's 19% in consumer staples and VTV's 24% in financials) reduce reliance on volatile sectors.
- Focus on Quality Screens: SCHD's exclusion of companies with weak fundamentals and VTV's emphasis on book value provide better protection against value traps.
- Monitor Interest Rates: SPYD's real estate and utilities exposure make it highly sensitive to rate hikes. Investors should consider hedging with short-term bonds or inverse rate ETFs during rising-rate environments.
Conclusion
SPYD's 4.5% yield is a siren song for income investors, but its sector concentration creates blind spots in a volatile market. While it excels at generating dividends, alternatives like SCHD and VTV offer a more balanced approach, combining high-quality stocks with diversification to safeguard principal. In an era of heightened economic uncertainty, resilience—not just yield—should be the priority.
For now, the prudent move is to allocate cautiously to SPYD, using it as a complement to broader value strategies. As the old adage goes: Dividends are nice, but capital preservation is nicer.
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