Investors often associate international investments, even developed markets, as being more volatile than U.S. equities, but a growing number of ETFs help investors access international markets with reduced volatility.
That group includes the Legg Mason International Low Volatility High Dividend ETF (BATS: LVHI). LVHI tries to reflect the performance of the QS International Low Volatility High Dividend Hedged Index, which tries to provide stable income through investments in stocks of profitable companies in developed markets outside the U.S. with relatively high dividend yields and lower price and earnings volatility while diminishing exposure to exchange-rate fluctuations between the U.S. dollar and other international currencies.
“The portfolio is constructed to have the highest scoring securities subject to concentration limits: no individual component of the Index will exceed 2.5% of the Index, no individual sector will exceed 25%, no country will exceed will exceed 15%, no individual geographic region will exceed 50%, and real estate investment trust (REITs) components as a whole will not exceed 15%,” according to Legg Mason.
The profitability screen filters stocks that have been profitable over the last four quarters and are projected to remain profitable over the next four quarters, so companies will have the earnings power to support their dividends.
LVHI, which debuted in July 2016, held nearly 120 stocks with a weighted average market capitalization of $43.2 billion at the end of the third quarter. At that time, LVHI’s roster featured exposure to 22 countries, all of which were developed markets.
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The U.K. and Switzerland, two of Europe’s most dependable dividend markets, combine for 26.6% of LVHI’s weight. Spain, the Eurozone’s fourth-largest economy, is nearly 11% of the fund’s weight. Japan, a market where dividends and buybacks have been steadily climbing in recent years, represents 10% of LVHI’s portfolio.
The volatility measure will look for price volatility based on the past 12 months of daily returns earnings volatility, along with 3 years realized and 2 years projected. Historical data suggest that over the long term, lower volatility stocks offer better risk-adjusted returns than their more volatile counterparts.
In addition to an attractive dividend yield of 3.6%, LVHI’s price-to-earnings ratio of just over 13 implies significant discounts to not only the S&P 500, but the MSCI EAFE Index as well. LVHI charges 0.41% per year, or $41 on a $10,000 investment.
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