In light of ongoing global volatility, Legg Mason launched an international currency-hedged exchange traded fund version of its popular low-volatility, high-dividend strategy.
The newly added Legg Mason International Low Volatility High Dividend ETF (BATS: LVHI) will target international stocks that come with low volatility and high dividends. LVHI has a 0.40% expense ratio.
The new fund expands on the original Legg Mason Low Volatility High Dividend ETF (NasdaqGM: LVHD), which has been trading since December 15, 2015.[related_stories]
LVHI tries to reflect the performance of the QS International Low Volatility High Dividend Hedged Index, which tries to provide stable income through investments in stocks of profitable companies in developed markets outside the U.S. with relatively high dividend yields and lower price and earnings volatility while diminishing exposure to exchange-rate fluctuations between the U.S. dollar and other international currencies.
Specifically, the dividend screen targets companies that are projected to continue to pay relatively high dividends, and LVHI’s screen process also takes into consideration the country-specific tax treatment of dividends.
The profitability screen filters stocks that have been profitable over the last four quarters and are projected to remain profitable over the next four quarters, so companies will have the earnings power to support their dividends.
“Distressed companies are less likely to maintain dividend payments,” according to Legg Mason. “Our process seeks to select stocks that pay consistent dividends and screens out stocks that are either unprofitable or whose trailing or projected earnings do not appear to support the dividend.”
The volatility measure will look for price volatility based on the past 12 months of daily returns earnings volatility, along with 3 years realized and 2 years projected.
“Research has observed a ‘low-volatility anomaly,’ where stocks with lower volatility than the overall market have historically outperformed on risk-adjusted basis over time,” according to Legg Mason.
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Lastly, the currency hedging component may provide an opportunity for meaningful risk reduction.
“The LVHI ETF hedges its currency exposure in an attempt to further mitigate risk,” according to Legg Mason. “Consider this example: The day of the U.K. referendum (“Brexit”), many U.K. equities were down and the pound suffered a deep drop. The currency drop magnified the negative effect on U.K. equities for U.S. investors. Seen in hedged currency terms, the drawdown was considerably lower.”