As the smart beta boom takes flight, a popular concept has been to combine investment factors or strategies under the umbrella of one exchange traded fund. An example of this theme is the combination of dividends and the low volatility factor in one ETF.
One ETF that pledges payouts and a roster chock full of low volatility stocks is the Legg Mason Low-Volatility High-Dividend ETF (NASDAQ: LVHD). LVHD debuted in late 2015 and is one of three dividend/low volatility ETFs from Legg Mason.
LVHD’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.
LVHD’s international counterparts are the Legg Mason Emerging Markets Low Volatility High Dividend ETF (BATS: LVHE) and the Legg Mason International Low Volatility High Dividend ETF (BATS: LVHI). Both LVHI and LVHE employ currency hedging in attempts to further mitigate risk which may help during times of extreme market disruption.
LVHD “first screens for companies that have been profitable over the last year and are projected to remain profitable over the next year according to consensus analyst forecasts. Companies dividends must also be sustainable, namely their past and predicted earnings must fully support their dividends. The yield on the remaining stocks is adjusted upward or downward based on both stock price and earnings volatility,” according to a Seeking Alpha analysis.
Like rival ETFs that combine dividends and the low volatility factor, LVHD’s roster is not particularly large. The ETF holds 81 stocks, most of which are large-caps as highlighted by the weighted average market value of $76.9 billion at the end of the first quarter. LVHD’s sector weights are, at least at the top, are not surpising.
At the end of the first quarter, LVHD allocated nearly 39% of its combined weight to utilities and staples stocks, two of the hallmarks of dividend/low volatility strategies. The ETF’s 10.5% weight to tech stocks is something of a surprise in this type of fund, but the technology sector has been bolstering payouts in recent years.
“Combining fundamental measures of volatility (earnings) with statistical measures (price) should improve the performance of LVHD’s risk controls,” according to Seeking Alpha.
For more on smart beta ETFs, please visit our smart beta channel.