As our readers will know, we spent the better part of last week at the Inside ETFs conference. As part of our time there, we are planning to feature a couple of ETFs which we think might be interesting to advisors. The first one we want to feature is a special fund from Legg Mason, the fund is called the Legg Mason Low Volatility High Dividend ETF (LVHD). We were lucky enough to meet with one of the fund’s specialists, Josh Greco, at the conference, and his passion for the fund’s approach really shined through. The fund’s own words describe it best, it seeks to track “the investment results of an underlying index composed of equity securities of U.S. companies with relatively high yield and low price and earnings volatility … LVHD may benefit investors who want income but are concerned about the volatility that can come from traditional equity income investments”. Basically, the idea is to get yield and upside, without so much of the volatility that is traditionally associated with equities. Mr. Greco contextualized the utility of the approach succinctly and convincingly, explaining that as clients’ lives elongate they are going to need to stay in equities longer to get capital appreciation. Accordingly, this fund seeks to de-risk some of that necessary exposure while still giving significant upside and yield. The fund has about $600m in AUM, is widely available, has an expense ratio of 0.27%, and a dividend yield of 3.48%.
FINSUM: In our mind, this fund does an excellent job of fusing some of the best elements of fixed income (yields and less volatility) with the best part of stocks (capital appreciation). It may be a great fit for older clients that need to keep a significant allocation to equities. It is also quite affordable at 0.27%.
One of the hottest trades in the last several months has been to buy a basket of low volatility stocks. The idea is that one can insulate their portfolio from the market’s fluctuations by buying stocks that are less likely to see swings in value. The problem is, the trade has gotten very crowded. Legal & General Investment Management says that “Low volatility might be becoming vulnerable as investors chasing recent performance and buying into gloomy 2018 outlooks flock into it … It is becoming a relatively consensus position, which for us is a warning sign”.
FINSUM: Low volatility stocks held up well in the tumultuous fourth quarter, but the attractiveness of the strategy has made valuations quite high. Such stocks typically lag in upward markets, so there does seem to be some significant risk here.
With the market still facing some volatility after last month’s beating, some investors might be inclined to seek out stocks that may stay relatively safe from big moves. One strategy for doing so could be to look for companies with low debt. Low debt brings greater financial flexibility to companies and generally makes investors much less worried about their ability to meet their obligations. According to Barron’s “Stocks of firms with low debt have outperformed those with higher debt by about one percentage point a year for the past 25 years … Low debt companies are also less volatile than the overall market, on average”.
FINSUM: This seems like a good parameter by which to carve out a safer portion of a portfolio, though as our readers will know, we generally don’t like using historical returns alone as a guide.
Markets are up since Christmas, but anybody who feels like they are on solid footing is probably a fool. So one of the big questions right now is how to play risky markets? Well, Barron’s has just published a piece outlining what they see as the best funds for such an environment. The picks are based on 15-year performance, including how funds performed during the Financial Crisis. Here are some to look at: AMG Yacktman, Parnassus Core Equity, Invesco Dividend Income, JP Morgan Small Cap Equity, and Neuberger Berman Genesis.
FINSUM: Not a bad idea to look at the funds that have been the best overall risk managers.
How do you know when the market is bad? When the safest stocks are also the best performing. It sounds like an old market joke, but it couldn’t be more true right now. Stocks are down around 10% this month, the worst December since the Great Depression. A good sample of these low volatility stocks can be found in Invesco’s S&P 500 Low Volatility ETF (SPLV). That ETF has fallen just 7% from the market’s September peak, while the S&P 500 has fallen 16%. Looking at correlations, the majority of stocks with the best 90-day momentum are also those with the lowest volatility.
FINSUM: The market is playing defense, and with good reason.