2023-10-18 17:13:03 ET
Summary
- Franklin International Low Volatility High Dividend Index ETF targets low-volatility stocks with high yield.
- The LVHI ETF uses a proprietary methodology to calculate a composite "stable yield" score.
- LVHI has been outperforming the S&P 500 since 2022 and offers an attractive dividend yield.
You are remembered for the rules you break. - Douglas MacArthur.
I believe we're in an age of turbulence, and volatility management will be increasingly important. If I'm right about that, fundamentals should matter again, and investing in relatively more stable stocks is the way to go. That's where the Franklin International Low Volatility High Dividend Index ETF ( LVHI ) comes into play. This is an exchange-traded fund, or ETF, that stands out due to its unique approach in targeting low-volatility stocks that provide high yield. I think it's actually an interesting fund that can serve as a solid position in an equity portfolio given the environment I believe we are now in.
Understanding LVHI
LVHI is an ETF that seeks to track the investment results of an underlying index composed of equity securities of developed markets outside the United States with relatively high yield and low price and earnings volatility. The fund was issued by Legg Mason Partners Fund Advisor LLC back in 2016. It is co-managed by Franklin Advisers Inc. LVHI hedges currency exposure in an attempt to further reduce volatility - a big plus in my view.
LVHI's Investment Strategy
LVHI uses a proprietary methodology to calculate a composite "stable yield" score, with the yield of stocks with relatively higher price and/or earnings volatility adjusted downward and the yield of stocks with relatively lower price and/or earnings volatility adjusted upward. The fundamental focus here is a plus.
In addition, the "stable yield" score of stocks from countries with relatively high interest rates compared to the U.S. is adjusted downward and the score of stocks with relatively low interest rates is adjusted upward, so as to reflect the implicit cost of currency hedging. The index weights are then calculated to maximize its stable yield score subject to concentration limits, liquidity requirements and turnover restraints. The index includes stocks with a high "stable yield" score, with weightings taking into account liquidity requirements and concentration limits on sector exposures, country exposures, and individual stock holdings" according to the fund fact sheet.
LVHI's Currency Hedge
LVHI's hedge is designed to neutralize currency risks for investors based in the U.S. It uses foreign currency forward contracts, futures, and swaps to offset the impact of currency fluctuations on fund returns. However, the return of the currency-related derivatives will not perfectly offset the actual fluctuations between the currencies and the U.S. dollar. It's crucial to understand that while the hedge can minimize the impact of currency fluctuations, it may also potentially hurt returns if the dollar declines.
LVHI's Portfolio
LVHI's portfolio is well-diversified across countries, sectors and holdings. The largest country exposures are in Japan, the United Kingdom, and Canada. The non-U.S. focus of the fund, I believe, is a plus from a value perspective.
LVHI's Performance Analysis
International investing in general hasn't been easy for many years, but interestingly enough this fund has been outperforming the S&P 500 (SP500) since 2022. Not an easy dynamic, and one that can continue, especially if things keep getting more volatile for equity markets more broadly. The price ratio suggests it's starting to outperform here.
LVHI's Dividend Yield
LVHI offers an attractive dividend yield, with its 30-Day SEC Yield at around 5.4%. However, its distributions have been quite unpredictable. The TTM yield is partly based on an irregularly large distribution made at the end of 2022. Still - for what the fund does and given the volatility profile, the yield LVHI puts out is relatively attractive.
Peer Comparison
There are other funds that have different spins on this approach. The WisdomTree International Hedged Quality Dividend Growth Fund ETF ( IHDG ) is one example. IHDG does not follow the low-volatility rule in the same way, and when compared against LVHI, it turns out that that rule is actually helping LVHI to outperform more recently.
The Verdict
Investing in LVHI presents a unique opportunity to gain exposure to international low-volatility high-dividend stocks. It's worth noting that LVHI offers a potentially defensive play in the current overvalued momentum-driven U.S. market. For investors willing to take on some risk in exchange for high dividends and international exposure, LVHI could be an interesting choice to consider.
For further details see:
LVHI: An Interesting And Potentially Defensive Fund