A potent combination in the world of smart beta exchange traded funds has been the marriage of the low volatility factor and dividends. That combination can be accessed via the Legg Mason Low-Volatility High-Dividend ETF (NASDAQ: LVHD), among other funds.
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.
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.
“Not only has the ETF outperformed the index, but it has also fared better during periods of declines. The ETF’s beta, for example, is 0.52, compared with 1 for the market index. A beta of less than 1 means that a security is theoretically less volatile than the market,” reports Philip Van Doorn for MarketWatch.
LVHD debuted in late 2015 and has already attracted a solid following as highlighted by the ETF’s $127 million in assets under management. The ETF’s portfolio “is constructed of the highest scoring securities subject to concentration limits: no individual component of the Index will exceed 2.5%, no individual sector (as defined by QS) will exceed 25%, and real estate investment trust (“REIT”) components as a whole will not exceed 15%. The number of component securities in the Index is anticipated to range from 50 to 100,” according to Legg Mason.
At the end of the first quarter, LVHD had a 30-day SEC yield of 3.3%, which was well above the dividend yield on the S&P 500 and the yield on 10-year U.S. Treasuries. The weighted average market value of LVHD’s 81 holdings is almost $77 billion.
LVHD’s “index is close to 20 times trailing earnings today, up from only 8.4 times when the market bottomed in March 2009, the low point in the bear market and the beginning of the bull market,” according to MarketWatch.
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