Low- and minimum-volatility funds become popular whenever nerves start to fray, such as during the near bear market of 2018. Given a potentially combustible U.S. election cycle, 2020 seemed a likely candidate for a low-vol resurgence, and the coronavirus outbreak cinched it, driving anxious investors headlong into these funds.
Legg Mason Low Volatility High Dividend ETF (symbol LVHD) is one of a few low-vol funds that target holdings that not only are more stable than the market overall but also dole out above-average income. The fund starts with a screen of 3,000 U.S. stocks, homing in on profitable firms with sustainable dividend yields. Stocks are then scored based on price and earnings volatility. No stock can exceed 2.5% of assets at the time of the ETF’s quarterly rebalancing; no sector can exceed 25% of assets.
The ETF’s 80 current holdings are heavy in utilities, real estate stocks and consumer staples, which together account for 56% of assets. Top holdings with generous dividends, such as Duke Energy (DUK), give the ETF a yield of 3.3%, far above the 1.9% yield of Standard & Poor’s 500-stock index and that of most traditional U.S. low-vol funds.
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The ETF has lagged the market since its 2015 inception—not surprising, given its preference for calmer holdings, especially during a roaring bull market. But the ETF isn’t designed to outperform the market over long bull stretches—it’s much better suited for downturns, such as in the fourth quarter of 2018, when it beat the index by 8.1 percentage points.
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