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.”