“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.”