Investors should consider alternative index based or smart beta exchange traded fund strategies that could diminish overexposure to current market risks and potentially enhance returns through diversified, rules-based risk management.
ETF Trends publisher Tom Lydon spoke with James Norman, President of QS Investors, and Mike LaBella, Portfolio Manager of QS Investors, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk about their partnership with the Legg Mason brand.
“We actually became part of the Legg Mason family as an independent affiliate almost three years ago, and one of the reasons we were really excited because Legg Mason really wanted to get into the ETF business in a big way,” Norman said.
Consequently, Legg Mason with QS Investors research have devised a suite of smart beta ETFs to help investors potentially enhance returns through a number of diversified investment strategies across various market segments. For instance, Legg Mason’s suite includes the Legg Mason US Diversified Core ETF (NasdaqGM: UDBI), Legg Mason Developed Ex-US Diversified Core ETF (NasdaqGM: DDBI) and Legg Mason Emerging Markets Diversified Core ETF (NasdaqGM: EDBI) to help investors gain exposure to various broad global markets.
As we look ahead, in a prolonged bull market environment, investors will have to consider ways to mitigate risks and still capture any potential upside left.
“I would say the biggest sort of risks that are presented to most investors out there is that they’re really trying to balance risk and return, especially as they have low expected return expectations for fixed and equity,” Norman said. “How do they navigate navigate potential drawdowns in both of those markets as well as volatility?”
Through a partnership with QS Investors, the three funds take a macro, top-down approach that help balance risk to deliver broad market exposure through QS Investors’ proprietary Diversification Based Investing (DBI) rules-based methodology. Through the DBI approach, the group of global stock ETFs should exhibit low correlation of excess return to active stock managers and traditional market cap-weighted indices. The DBI methodology also helps diminish concentration risk within country and sector exposures.
“2016 was the year when you expect the unexpected, and we don’t see that changing in 2017, so we think advisors should really be focused on two things: Continuing to generate stable income, and we think equity dividends are still an attractive place to do that as well as a focus on capital preservation. And we think low volatility, high-dividend type strategies can really play a key role in the portfolio,” LaBella said.
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 Legg Mason Low Volatility High Dividend ETF (NASDAQ: LVHD), Legg Mason International Low Volatility High Dividend ETF (BATS: LVHI) and 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.