U.S. stocks have been racing to record highs, but this year’s upside has not been a volatility-free ride. Value stocks and lower volatility sectors have been prized by investors, explaining why low volatility exchange traded funds have been in style this year.
An important lesson in evaluating low volatility ETFs is to start by realizing that just because two funds purport to offer reduced volatility, that does not mean they are identical twins. Some of the largest low volatility ETFs prove as much and some rookie funds are offering new spins on the “low vol” phenomenon. [Rocky Markets Send Investors to Low Vol ETFs]
That group includes the Compass EMP US EQ Income 100 Enhanced Volatility Weighted Index ETF (NYSEArca: CDC). Compass EMP Funds, the Tennessee-based registered investment advisor and index developer, introduced CDC in July as part of the launch of its three ETFs. [Compass Introduces Three Volatility-Weighted ETFs]
CDC tracks the CEMP U.S. Large Cap High Dividend 100 Long/Cash Volatility Weighted Index, a passive index that is comprised of the ” highest dividend yielding stocks of the CEMP U.S. Large Cap 500 Volatility Weighted Index,” according to Compass.
What makes CDC unique among volatility ETFs is how the fund mitigates volatility. That strategy includes the ability to move to cash during turbulent market environments. CDC can move to 75% cash its underlying index experiences an 8% drop from its highest daily value.
CDC’s 100 stocks are weighted based on their daily standard deviation (volatility) over the last 180 trading days compared to the aggregate mean, according to Compass. The strategy works. Since inception in September 2000, CDC’s index has outperformed the S&P 500 by seven-to-one, according to Compass data.
If fully invested, CDC’s dividend yield at the end of the third quarter was a tidy 3.64%, or 130 basis points above where 10-year Treasury yields closed Monday.
CDC’s admirable yield is fostered in part by its 38.4% weight to the utilities and consumer staples sectors. The ETF’s 22.2% utilities weight is one of the largest among dividend ETFs and that has been a positive in a year which that sector is the top performer in the S&P 500. [Winning: Dividend ETFs With Big Utilities Weights]
CDC’s value tilt comes by way of a 31% combined weight to the financial services, consumer discretionary sectors. The ETF’s does not allocate more than 1.52% of its weight to a single holding. CDC’s holdings include Wal-Mart (NYSE: WMT), McDonald’s (NYSE: MCD), Kimberly Clark (NYSE: KMB), Johnson & Johnson (NYSE: JNJ), Clorox (NYSE: CLX), Consolidated Edison (NYSE: ED) and Cincinnati Financial (NasdaqGS: CINF), all of which are members of the S&P 500 Dividend Aristocrats Index, which only includes companies that have increased their dividends for at least 25 consecutive years.
CDC touched a new all-time high on Monday.
Compass EMP US EQ Income 100 Enhanced Volatility Weighted Index ETF
