Some exchange traded funds are versatile across a variety of market settings, but some of these funds can and do truly shine under specific circumstances.
Take the case of the Franklin U.S. Low Volatility High Dividend Index ETF (NASDAQ: LVHD). Amid 2022’s turbulent market climate, high dividend and low volatility are two of the best-performing factors on a standalone basis.
Combine the pair under one umbrella, as does LVHD, and the results can be potent. LVHD’s merits are on full display this year as the Franklin Templeton fund is down just 3% compared to a loss of 13% for the S&P 500.
“Minimizing volatility has been an effective strategy so far in 2022,” notes Morningstar analyst Bryan Armour. “But its success isn’t limited to recent market turbulence. Over the past 10 years, this fund has pummeled category peers on a risk-adjusted basis, thanks to its low volatility and competitive returns. Its low cost also provides a durable advantage over the long run. There’s no doubt that this fund will continue to take the edge off rocky markets.”
While LVHD is an index-based ETF, it has some constraints and rules that could make it a more appealing mousetrap than standard low volatility ETFs. LVHD’s dividend yield of 2.85% is tempting, but the fund’s methodology also ensures an element of quality.
“Cutting down risk doesn’t solely come from favoring stocks with lower return volatility. The strategy requires companies to have sufficient earnings and cash flow to support their dividend payments and penalizes stocks with higher earnings volatility,” added Armour.
As noted above, LVHD’s payout yield of 2.85% stands out relative to broad market benchmarks, but it’s not alarmingly high. That’s important because it’s an indication that while the fund is framed as a high-dividend strategy, its roster isn’t comprised of companies that could be burdened by dividend obligations, leading to eventual cuts or suspensions. So while LVHD’s yield isn’t high to point of being jaw-dropping, the fund does an admirable job of being a best of both worlds play.
“The fund’s focus on limiting risk moderates its quest for yield. But this approach has been effective, nonetheless. The strategy has been a consistent outperformer during periods of heavy declines, like so far in 2022 and during the COVID-19 drawdown in 2020. The fund has exhibited significantly lower volatility and outperformed its average category peer on risk-adjusted terms over the past five years,” concluded Armour.
For more news, information, and strategy, visit the Volatility Resource Channel.
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.