Time to Consider the Volatility Reducing Capabilities of Aristocrats

After Wednesday’s drubbing, the bull market is either on life support or over, but that condition won’t be permanent and with Treasury yields still low, investors searching for income with lower volatility may want to evaluate strategies such as the ProShares S&P 500 Aristocrats ETF (CBOE: NOBL).

NOBL tracks the S&P 500 Dividend Aristocrats Index, targets the cream of the crop, only selecting components that have increased their dividends for at least 25 consecutive years. Consequently, investors are left with a portfolio of high-quality, sustainable dividend payers.

Relevant to today’s trying market setting, NOBL and its underlying index have histories of capturing significantly less downside than traditional equity funds when markets slump.

“The S&P 500 Dividend Aristocrats, the index that NOBL tracks, has a history of weathering market turbulence,” said Kieran Kirwan, Director, Investment Strategy at ProShares, in remarks emailed to ETF Trends. “Since its inception in May 2005, it has captured only 78% of the markets downturns, while providing over 91% of the upside.”

Good Timing

As the recent 86% dividend cut by Occidental Petroleum (NYSE: OXY) confirms, investors need to be picky with dividend stocks. In trying market environments, they should consider quality dividend growth stocks that typically exhibit, stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders and management team conviction in their businesses.

NOBL gives investors a portfolio of high-quality, sustainable dividend payers as opposed to more high-yield focused funds that may contain companies on more precarious financial positions.

“Since inception in May 2005, the Aristocrats have outperformed the S&P 500 in 4 of the 5 worst quarterly drawdowns,” said Kirwan. “The average outperformance was almost 3%.”

Dividend strategies can help mute the impact of volatility by giving investors a steady income stream in the event the markets do get bumpy as a result of unforeseen news events. Historical data confirm NOBL can be a winning idea for investors with longer holding periods, making the fund an ideal choice for young investors just starting out. NOBL is built for long-term investors and data following market tumbles confirms as much.

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“Note that the Aristocrats also tend to outperform in subsequent rebounds over the subsequent 1-, 3-, and 5 year periods,” said Kirwan.

NOBL holds 64 stocks and allocates 42.6% of its weight to the consumer staples and industrial sectors.

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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.