Investors often focus on growth versus value competition, but there are investment factors to consider. That sentiment is on full display this year as the low volatility and dividend factors are among the few that are producing decent results for investors.
The Franklin U.S. Low Volatility High Dividend Index ETF (NASDAQ: LVHD) is among the exchange traded funds benefiting from those trends. On a year-to-date basis, LVHD is sharply outpacing the S&P 500 and the S&P 500 Low Volatility Index, confirming that the methodology underlying beta-reducing ETFs is meaningful.
“Beta is a commonly cited risk measurement that gives insight into how volatile an investment has been compared to the broader market. Investments with a beta greater than 1.00 tend to be more sensitive to market movements, while investments with a beta lower than 1.00 tend not to move as far up or down as their broader-market benchmark,” noted Morningstar analyst Lauren Solberg.
While beta is a wonky, inside baseball term, it’s easy for investors of all skill levels to understand, as noted above. On a related note, LVHD’s approach is easy to understand as well. The Franklin Templeton ETF is simply a basket of stocks with attractive volatility (beta) traits and compelling dividend yields.
As experienced investors, trimming beta can be effectively accomplished by avoiding certain sectors. LVHD efficiently accomplishes that objective.
“High-beta stocks can often be found within the cyclical super sector, a grouping of stocks from industries that are highly impacted by economic shifts. Investors might assume that technology stocks are the highest beta group, but for the 10-year trailing period, the group actually ranks fourth, behind energy, consumer cyclical, and basic materials. (These rankings can shift when looking over different time frames. For the past year, energy stocks have been very low beta,” added Solberg.
Energy, materials, and technology stocks combine for about 9% of LVHD’s roster while the ETF has no exposure to consumer discretionary equities. Those are among the reasons why LVHD’s 2022 annualized volatility is lower than the S&P 500, S&P 500 Low Volatility Index, and its primary competitor in the high dividend/low volatility ETF category. Add it all up and LVHD is a relevant idea for the rest of 2022.
“High-beta stocks look cheap, but, by definition, they also come with higher risk. As uncertainty around inflation and the Fed’s response continues to plague the markets, volatility will put high-beta stocks at risk for steeper downturns. For risk-averse investors, low-beta stocks can offer a haven,” concluded Solberg.
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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.