Market Overview

Is It The Right Time For This Dividend ETF?

Is It The Right Time For This Dividend ETF?

Growth stocks and the technology sector have been getting most of the attention for this year's market rebound, but investors that dig a little deeper will find that some defensive sectors and exchange traded funds are performing well, too.

What Happened

Last Friday, a dozen real estate and utilities ETFs hit all-time highs, underscoring the strength in defensive sectors. That group doesn't include ETFs, such as the Legg Mason Low Volatility High Dividend ETF (NASDAQ: LVHD).

LVHD, which debuted in late 2015, “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 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.

Why It's Important

LVHD is relevant right now because, like many strategies that combine high dividends with the low volatility factor, the fund is heavily allocated to sectors that are currently performing well. The utilities and real estate sectors are LVHD's largest and third-largest sector weights, respectively, combining for 41.3 percent of the fund's weight.

The $632.33 million LVHD yields 3.49 percent, or 156 basis points more than the dividend yield on the largest low volatility ETF, which LVHD is slightly outperforming this year.

Like any low volatility ETF, the objective of LVHD is not to capture all of the broader market's upside in bull markets, but rather to provide less downside exposure when stocks decline. LVHD's upside capture ratio against a broad market index is 0.73 and its downside capture ratio is just 0.53, according to issuer data.

What's Next

With the Federal Reserve widely expected to not raise interest rates this year, rate-sensitive sectors are poised to continue delivering upside, which should benefit LVHD. The other side of that coin is that if economic activity and inflation surprise to the upside, the Fed may be compelled to revisit higher rates, a scenario that would likely plague funds such as LVHD.

Utilities, consumer staples and real estate stocks combine for over 59 percent of LVHD's weight, indicating the fund lacks cyclical exposure and could be vulnerable to hawkish Fed surprises.

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