A fund that is composed of stocks with low volatility and high dividend is highly demanded by the market to serve investors. It is especially ideal for those reaching retirement age. Two such representative funds available now are LVHD and SPHD.
The Legg Mason Low Volatility High Dividend ETF, LVHD, is constructed on top of QS Low Volatility High Dividend Index. Just launched in the end of 2015, by the ETF new entrant – Legg Mason, LVHD has amassed $126 million with a decent expense ratio of 0.30%.
The construction of this index starts with the Solactive US Broad Market Index containing the largest 3,000 U.S. stocks. Then a dividend screen is wrapped on to filter out stocks that have paid or projected to continue paying high dividend yields, next, the profitability screen is add on to find stocks with high profitability in the last four quarters, thirdly, volatility measure is added, which is composed of two elements, the first element is price volatility, calculated as the past 12 months price volatility based on daily returns, the second element is earnings volatility, calculated by past 3 years realized and 2 years projected. The final rank of stocks will be based on the dividend and profitability composite, adjusted by volatility up and down accordingly.
PowerShares S&P 500 High Dividend Low Volatility Portfolio, SPHD, tracks S&P 500 Low Volatility High Dividend Index. was issued early as October 2012, with an AuM of $3.07 billion.
Both SPHD and LVHD asked 0.30% expense ratio, but the liquidity measured by the spread of SPHD is far deeper than that of LVHD, 0.03% versus 0.14%.
To be eligible in the S&P 500 Low Volatility High Dividend Index, the stock has to be a member of the S&P 500 and must have traded on all 252 trading days in the 12 months leading up to the rebalancing reference date. The selection of index constituents is done as follows:
- All stocks in the selection universe are ranked in descending order by their 12-month trailing dividend yield, calculated as their dividends per share for the prior 12 months., divided by the stock price as of rebalancing reference date.
- The top 75 stocks with the highest dividend yield are selected, with the number of stocks from each GICS sector capped at 10. If the number of stocks from a sector reaches 10, the remaining highest yielding stocks from other sectors are selected until the number of the selected stock reaches 75.
- Using available price return data for the trailing 252 trading days leading up to each index rebalancing reference date, the realized volatilities of the 75 selected highest yielding stocks are calculated. Realized volatility is defined as the standard deviation of the security’s daily price returns over the prior 252 trading days.
- The 75 selected highest yielding stocks are, then, ranked in ascending order by realized volatility. The top 50 securities with the lowest realized volatility constitute the index.
The index employs a yield driven-weighting scheme. To avoid a high turnover, index constituent that appears to violate criteria for addition to that index is not deleted unless ongoing conditions warrant an index change. (Referencing the S&P 500 Low Volatility High Dividend Index methodology)
Now let’s compare the performance and holdings of these two funds. From the methodology description, SPHD contains 50 stocks, while LVHD’ varies between 50 and 100.
SPHD and LVHD show similar performance even with two different histories. Neither one has beaten the market though. What’s worth noting is that the standard deviation of LVHD-US is 0.023073, S&P500, 0.029067, and SPHD-US, 0.027638. Therefore, LVHD and SPHD’s volatilities are lower than S&P500, but not much lower.