With the S&P 500 coming off its worst first-half showing in 50 years, it’s fair to say that not much is working with equities this year. However, investors shouldn’t abandon all hope.
Better than hope are tangible, somewhat positive results. This year, those are attainable via the high-dividend and low-volatility factors. Fortunately, some exchange traded funds combine both concepts under one umbrella. That group includes the Franklin U.S. Low Volatility High Dividend Index ETF (NASDAQ:LVHD).
Proving that the high-dividend/low-volatility combination can be potent, LVHD is beating the S&P 500 by nearly 1,400 basis points year-to-date.
“High dividend strategies have been popular in the recent market environment of high inflation and rising interest rates, where current income and shorter duration stocks are considered more favorable by some investors,” noted S&P Dow Jones Indices. “Similarly, low volatility stocks have outperformed due to their defensive qualities during increased market uncertainty.”
By outperforming the broader market during a trying time for equities, LVHD is accomplishing one of the primary goals of low-volatility ETFs. Additionally, LVHD is checking the reduced volatility box in a big way. Year-to-date, the fund’s annualized volatility is 830 basis points less than that of the S&P 500. That’s old hat for LVHD, which has been less volatile than the broader market over the past three years.
LVHD is also relevant in other ways. A dividend yield of 2.79%, which is 122 basis points in excess of the S&P 500’s, is alluring in a still-low interest rate environment. On that note, many investors find high-dividend stocks alluring solely because of yield without realizing that some high yield stocks are more volatile than they might expect. That underscores the utility of LVHD’s methodology.
“Finally, the high volatility/high-yield portfolio was much more volatile, with the lowest risk-adjusted return and largest maximum drawdown. Thus, out of these three hypothetical portfolios, the low volatility/high-yield portfolio delivered the highest risk-adjusted return and had the most pronounced maximum drawdown reduction,” added S&P Dow Jones.
The research firm is referencing the evaluation of high-dividend/low-volatility, high-dividend alone, and high-dividend/high-volatility portfolios.
Bottom line: Two concepts are clearly working in today’s bumpy equity market climate. With LVHD, investors can have their cake and eat it, too.
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.