U.S. Markets closed

Legg Mason's LVHD: More Income, Less Turbulence

Kyle Woodley, Senior Investing Editor, Kiplinger.com

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.

See Also: 10 Low-Volatility ETFs for This Roller-Coaster Market

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.

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.

See Also: The 12 Best ETFs to Battle a Bear Market


Copyright 2020 The Kiplinger Washington Editors