As the markets try to digest the consequences of a Donald Trump presidency, investors should consider a low volatility, dividend-focused ETF strategy.
“The best time to be in low volatility is when markets are complacent,” Mike LaBella, Portfolio Manager at QS Investors, told ETF Trends. “It is best to get ahead of volatility by going in when volatility is low.”
Specifically, the CBOE Volatility Index or VIX, the so-called fear index, spiked to above 20 in the days following the presidential election. However, the VIX has now dipped to 12.88, reflecting the growing complacency in the equities market on speculation that President-elect Trump would fuel inflation and economic growth. The index has reflected a relatively complacent market for most of the year, compared to an average VIX value of 19.8 or a median value of 17.9 since January 1990.
Long-term investors who want to generate income and achieve principal growth while maintaining enough stability in their portfolio to ride out short-term market swings should consider an ETF strategy that focuses on low volatility and high dividends, such as the the Legg Mason Low Volatility High Dividend ETF (NASDAQ: LVHD), Legg Mason International Low Volatility High Dividend ETF (BATS: LVHI) and recently launched Legg Mason Emerging Markets Low Volatility High Dividend ETF (BATS: LVHE).
The low volatility high dividend suite should help investors who are seeking new sources of yield in a changing market environment. The funds focus on companies with relatively high yield and low price and earnings volatility, and the funds also target profitable companies. Furthermore, LVHI and LVHE employ currency hedging to further mitigate international risk exposure.
This type of strategy has proven to help investors capture growing markets while limiting drawdowns during periods of increased volatility to generate improved risk-adjusted returns over the long haul.
The low volatility and high dividend strategy “has been shown to deliver both capital appreciation and income competitive with, or superior to, other reasonable alternatives,” Rosemary Macedo, Chief Investment Officer at QS Investors, said in a research note. “These results have come with more stability and attractive upside/downside capture.”[related_stories]
LaBella explained that investors would typically utilize a low volatility and high dividend methodology to generate income, preserve capital and supplement traditional fixed-income exposure.
The strategy could act as an alternative to traditional yield-generation investments, provide a steady stream of income from quality stocks and help manager portfolio risks.
The funds may help preserve capital as the low volatility focus may help the ETFs outperform over the long term due to lower drawdowns during periods of increased volatility. The low volatility factor also allows investors to hedge against uncertainty, such as geopolitical risks and shifting monetary or fiscal policies.
Lastly, the low vol/dividend strategy can act as an alternative to fixed-income assets as the three-decade long bull rally in bonds comes to an end. Money managers may find it harder to hit the required 60/40 stock/bond returns of yesteryear, but a low volatility and high dividend strategy may help fill in the gap.
“Low volatility and dividends help address the shift in portfolio risk,” LaBella said.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.