Various historical data points and research confirm that dividend-paying stocks are usually less volatile than their non-dividend counterparts. Additionally, stocks that are less volatile, over the long-term, typically outperform rivals that experience larger drawdowns or have higher standard deviations.
The takeaways are these: dividend stocks are less volatile, and the low-volatility factor can reward investors over long holding periods. So perhaps it is not surprising that when looking at a list of the largest smart-beta exchange-traded funds, many members on that list are dividend or low volatility funds.
In other words, dividend ETFs are popular. Same goes for low-volatility funds, so combining the two themes under the umbrella of one ETF could work. In some instances, it does. Investors that want to have their low volatility cake and eat it too, with dividends, have some interesting ETFs to consider. That group includes the following funds.
PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD)
Expense Ratio: 0.3% per year, or $30 on a $10,000 investment.
12-month Yield: 3.5%
The PowerShares S&P 500 High Dividend Low Volatility Portfolio (NYSEARCA:SPHD) was one of the first ETFs to explicitly target dividend stocks and the low-volatility factor. SPHD tracks the S&P 500 Low Volatility High Dividend Index, which is a collection of the 50 highest-yielding S&P 500 members with the lowest trailing-12-month volatility.
This dividend ETF is sector agnostic, but the combination of yields and reduced volatility give the fund some sector exposures that are not necessarily surprising. For example, SPHD’s top three sector weights are utilities, consumer staples and real estate. That trio combines for over 56% of the fund’s sector exposure.
SPHD has a 12-month distribution rate of 3.5%, so its yield is significantly higher than that of the S&P 500’s. Over the past three years, SPHD has slightly trailed the S&P 500 in terms of total returns, but this PowerShares fund has accomplished the objective of being less volatile while experiencing lower drawdowns than broader market benchmarks. SPHD pays a monthly dividend.
Legg Mason Low-Volatility High-Dividend ETF (LVHD)
Expense Ratio: 0.27%
12-Month Yield: 3.5%
The Legg Mason Low-Volatility High-Dividend ETF (NASDAQ:LVHD) is the primary rival to the SPHD among domestically focused ETFs emphasizing dividends and reduced volatility.
LVHD’s roster “is constructed of the highest scoring securities subject to concentration limits: no individual component of the Index will exceed 2.5%, no individual sector (as defined by QS) will exceed 25%, and real estate investment trust (“REIT”) components as a whole will not exceed 15%. The number of component securities in the Index is anticipated to range from 50 to 100,” according to Legg Mason.
The $497.5 million LVHD ETF has a significantly larger lineup than its PowerShares rival with 87 stocks, none of which exceed weights of 3.32%. LVHD’s holdings have a weighted average market value of $85.34 billion and include Dow components Boeing (NYSE:BA), Cisco (NASDAQ:CSCO) and Verizon (NYSE:VZ).
The utilities and consumer staples sectors combine for over 35% of this ETF’s weight. This dividend ETF yields 3.5% on a trailing 12-month basis and is three basis points per year cheaper than its PowerShares rival.
VictoryShares US Large Cap High Div Volatility Wtd ETF (CDL)
Expense Ratio: 0.35%
12-Month Yield: 2.8%
The VictoryShares US Large Cap High Div Volatility Wtd ETF (NASDAQ:CDL) follows the CEMP US Large Cap High Dividend 100 Volatility Weighted Index. That index has some requirements that can help reduce risk. Components are weighted by their standard deviation over the past 180 days and are required to be earnings positive for at least four consecutive quarters.
CDL’s strategy is effective as the ETF had a standard deviation of just 8% at the end of 2017, which is below the comparable metric on the S&P 500. Additionally, CDL’s underlying index has outpaced the S&P 500 by 170 basis points since the index was launched in July 2015.
Like rival low-volatility strategies, this VictoryShares ETF is heavily allocated to the utilities and consumer staples sectors as those groups combine for about 38% of CDL’s roster. Financial services and consumer discretionary stocks combine for approximately 28%.
PowerShares S&P SmallCap High Dividend Low Volatility Portfolio (XSHD)
Expense Ratio: 0.3%
12-Month Yield: 4.8%
Data suggest that small-cap dividend payers are usually less volatile than their non-dividend counterparts. The PowerShares S&P SmallCap High Dividend Low Volatility Portfolio (BATS:XSHD) builds on that notion by explicitly adding in the low-volatility factor.
This PowerShares ETF uses a similar methodology as does the aforementioned SPHD. XSHD follows the S&P SmallCap 600 Low Volatility High Dividend Index, a benchmark comprised of the 60 highest-yielding stocks from the S&P SmallCap 600 Index with the lowest trailing 12-month volatility. Like SPHD, XSHD also pays a monthly dividend.
XSHD devotes about 41% of its combined weight to real estate and financial services stocks while the utilities and materials sectors combine for 20%. This is a new dividend ETF, having debuted in December 2016, but investors looking to reduce small-cap volatility while boosting income should give this fund a look. After all, a 12-month distribution rate of 4.8% is hard to come by on traditional small-cap ETFs.
O’Shares FTSE Quality U.S. Dividend ETF (OUSA)
Expense Ratio: 0.48%
12-Month Yield: 2.3%
The O’Shares FTSE Quality U.S. Dividend ETF (NYSEARCA:OUSA) is the largest of the ETF’s in the O’Shares stable. OUSA tracks the FTSE USA Qual/Vol/Yield 5% Capped Factor Index. While that is not a dedicated low volatility benchmark, that factor is integral in the index’s methodology.
OUSA’s index “is designed to measure the performance of publicly-listed large-capitalization and mid-capitalization dividend-paying issuers in the United States that meet certain market capitalization, liquidity, high quality, low volatility and dividend yield thresholds,” according to O’Shares.
The integration of the quality factor in this dividend ETF suppresses its yield (2.3%), but that is a positive because it implies the fund’s holdings have room to grow their payouts. On a related note, OUSA has the lowest utilities weight of the ETFs highlighted to this point at just 5.1%.
Emphasizing quality stocks gives OUSA an almost 13% weight to the technology sector, which is above average relative to traditional domestic dividend ETFs. Top 10 holdings in the O’Shares fund include Johnson & Johnson (NYSE:JNJ), Exxon (NYSE:XOM) and Boeing (NYSE:BA).
Legg Mason Emerging Markets Low Volatility High Dividend ETF (LVHE)
Expense Ratio: 0.5%
12-Month Yield: 3.9%
There is no denying that emerging markets equities are more volatile than their developed market peers. There is also no denying that developing economies are home to some tempting dividend payers. The Legg Mason Emerging Markets Low Volatility High Dividend ETF (BATS:LVHE) helps investors access developing-world income with reduced volatility.
LVHE’s roster “is constructed to have the highest-scoring securities subject to concentration limits: no individual component of the Index will exceed 2.5% of the Index, no individual sector will exceed 25%, no country will exceed 15%, no individual geographic region will exceed 50%, and real estate investment trust (REITs) components as a whole will not exceed 15%,” according to Legg Mason.
Emerging markets ETFs that aim to trim volatility often feature large weights to a familiar group of countries, including China, Taiwan, Malaysia and South Korea. That quartet combines for about 57% of the ETF’s weight. Likewise, such ETFs are usually lightly allocated to emerging markets commodities producers, such as Brazil, Indonesia and South Africa. That is the case with LVHE.
LVHE’s 12-month dividend yield of 3.9% is well above the MSCI Emerging Markets Index, but this fund trades at a price-to-earnings discount to the emerging markets benchmark.
PowerShares S&P International Developed High Dividend Low Volatility Portfolio (IDHD)
Expense Ratio: 0.3%
12-Month Yield: 4.5%
Keeping with the themes of dividends, international stocks and low volatility, the PowerShares S&P International Developed High Dividend Low Volatility Portfolio (BATS:IDHD) delivers access to a basket (100 stocks to be precise) of developed markets dividend payers displaying favorable volatility traits.
This dividend ETF has a 12-month distribution rate of 4.5%, or more than double the dividend yield on the MSCI EAFE Index. However, that should not imply that IDHD components are strained to grow their payouts.
Japan is IDHD’s largest geographic weight at almost 18% and the world’s third-largest economy is certainly more of a dividend growth idea than it is yield play. The U.K. and Australia, two of the better ex-U.S. dividend growth markets, combine for 28% of this fund’s roster.
IDHD is still relatively new (it does not turn two until December 2018), but the fund returned almost 21% for the 12 months ended January 31, 2018.
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As of this writing, Todd Shriber owned shares of SPHD.