Last updated on February 14th, 2022 , 10:14 am
Jump To
In the stock market, peace of mind is hard to come by these days. 2022 is shaping up to be an even more volatile year that last year.
For investors who have had enough of the volatile swings, it would be nice to have a portion of your portfolio a.) receiving dividend income no matter what happens in the market and, b.) invested in a few stocks that don’t make your heart drop or race every time you check your account balance.
Before we get into the 5 pics, let’s take a moment to examine why high dividend, low volatility exchange-traded funds (ETFs) make sense.
Low Volatility ETFs/Stocks
A time-old expression regarding money states that higher risk = higher return. If the “low volatility anomaly” is correct, this adage may be broken, at least in the US stock market. The research behind this anomaly argues that low volatility stocks actually outperform their higher-beta peers over large periods of time. Sounds counterintuitive right? Maybe like something the most boring guy in the pub might say after a few beers?
That may be, but the low volatility anomaly theory has actually been proven.
Let’s take a look at a few reasons to explain why this anomaly exists.
1. Investors Are Irrational
Believing high beta stocks will vastly outperform more boring, low beta stocks, market participants often ignore the fundamentals and overpay for popular stocks. Just think about Tesla (TSLA) or Gamestop (GME) here. When these equities correct themselves, the buyer will never get back that heavy premium they paid to buy-in. Meanwhile, the turtle has passed the hare.
2. The Margin Factor
Many investors don’t have access to margin. They believe investing in riskier assets will pay off to make up for this lack of margin. Over time, these buyers also inflate the premium of risk heavy equities.
3. Limit to Arbitrage
So since this anomaly exists, why don’t market participants expose this irrational risk demand to turn a profit? Perhaps they would, but large portfolio managers have a benchmark, or a mandate to beat, and these benchmarks (such as the S&P 500) are frequently weighted heavily by very volatile equities.
High Divided Paying ETFs/ Stocks
So now we know why low volatility stocks are great, what about dividend-paying stocks? Well, aside from the obvious dividend, they too outperform!
Morgan Stanley has proven that from 1991 to 2015, dividend-paying stocks had an average annual return of 9.7%. Compare that to non-dividend paying stocks, which earned only 4.18% during the same period. Did your world just get blown?
But we’re not concerned about just stocks; we’re interested in what happens when the best ones get together and form a family. Without further ado, here are projectfinances 5 great high dividend, low volatility ETFs.
New to options trading? Learn the essential concepts of options trading with our FREE 160+ page Options Trading for Beginners PDF.
1. Legg Mason Low Volatility High Div ETF - LVHD
- Benchmark: Russell 3000 (broad market)
- Dividend Yield: 2.93%
- Expense Ratio: 0.27%
- 5 Year Return: 9.94%
- Beta: 0.82
Legg Mason’s Low Volatility High Dividend ETF is a great choice for truly risk-conscious investors. Why? Not only do the stocks within this fund meet the criteria to be on this list, but they are also diversified across numerous asset class categories.
In today’s increasingly diverging markets, it is important to have exposure to everything. Just think about what tech stocks did early on in the pandemic, and how later, when the reopening was being staged, industries left them in the dust.
If you were in the wrong sectors during this time, your portfolio definitely felt the hit. The LVHD ETF uses the Russell 3000 as its benchmark, which represents 98% of the public equity market in the US. However, the LVHD ETF currently only has 80 equities within it. The fund picks and chooses across the market cap spectrum only those stocks that meet their criteria; fat dividends and low risk.
The dividend yield of LVHD is also the highest on our list, coming in at an eye-opening 2.93% yield. The fees are also minuscule, with the average ETF fee hovering around 0.40%, LVHD crushes it with their low 0.27% expense ratio.
For the low volatility-seeking investor, LVHD could quite literally pay off some very nice dividends down the road.
LVHD Top Holdings
Consumer Staples: 23.51 %
Real Estate: 14.12 %
Utilities: 14.03 %
Health Care: 13.41 %
Industrials: 13.37%
2. ProShares Russell 2000 Dividend Growers- SMDV
- Benchmark: Small Cap Russell 2000® Dividend Growth Index
- Dividend Yield: 1.74%
- Expense Ratio: 0.41%
- 5 Year Return: 9.82%
- Beta: 0.80
Next on our list is ProShares Russell 2000 Dividend Growers ETF, SMDV. This ETF focuses on high dividend-paying stocks within the small-cap category. ProShares is very strict as to what companies get invited to be on their list: not only do the companies within this fund currently pay dividends, but they all have been doing so for at least the past 10 consecutive years.
Such companies with a track record of dividend-paying more often than not are more stable than their more volatile small-cap peers.
Another reason investing in SMDV may be a good idea for the low volatility-seeking investor is its low beta of 0.80 percent. Comparatively, The beta of IWM, one of the most popular ETFs in the small-cap space, is 1.27.
For the investor looking for low volatility exposure to the small-cap market, SMDV appears to be a great option.
SMDV Top Holdings
Financial Services: 25.16%
Utilities: 23.32 %
Industrials: 21.49%
Basic Materials: 7.95%
Consumer Defensive: 7.89%
3. Invesco S&P 500® Low Volatility ETF - SPLV
- Benchmark: S&P 500 Low Volatility Index
- Dividend Yield: 1.66%
- Expense Ratio: 0.25%
- 5 Year Return: 10.88%
- Beta: 0.70
Invesco’s S&P 500 Low Volatility ETF, SPLV, is a great way for investors to get exposure to 1) the best capitalized, and 2) the least volatile companies in the US. This fund attempts to mirror that of the S&P 500 Low Volatility Index, which is a weighted index that ranks the companies within it by their volatility. The less volatile a firm is, the higher its weighting within the index.
The S&P Low Volatility Index has within it 100 stocks, all falling under the large-cap or mid-cap category (with the former outweighing the latter). The SPVL ETF currently has 103 stocks within it, making the ETF slightly more expansive than the index.
Just like the index, SPLV rebalances its holdings quarterly, which helps to keep up with the perennially shifting volatility in today’s markets.
Worth mentioning too is the fund’s low beta of .70, as well as its modest expense ratio of 0.25%. For more specialized funds like SPLV, that fee isn’t too bad at all.
SPLV Top Holdings
Consumer Staples: 22.85%
Utilities: 15.81 %
Health Care: 14.74%
Industrials: 12.48%
Financials: 9.69%
4. iShares MSCI Emerging Markets Min Vol Factor - EEMV
- Benchmark: MSCI Emerging Markets Minimum Volatility (USD) Index
- Dividend Yield: 2.31%
- Expense Ratio: 0.25%
- 5 Year Return: 6.91%
- Beta: 0.74
The iShares MSCI Emerg Mkts Min Vol Fctr ETF EEMV takes the pic for top emerging markets low volatility, high dividend ETF. This ETF tracks the MSCI Emerging Markets Minimum Volatility (USD) Index.
The investor seeking safety may be tempted to avoid emerging markets altogether, but to be truly safe you must be truly diversified, and to be truly diversified you must have exposure to all different kinds of equities, including those of emerging markets.
There are two big reasons this ETF is on our list. The first is the exceptionally high dividend yield of 2.31%. Most investors don’t associate emerging markets with high dividends, but that is exactly the case here.
The second reason is the fund’s low beta of 0.74%, which may help to bring a few volatility-burnt investors onboard. When compared to the volatile history of the MSCI Emerging Markets Index, EEMV has fared quite well. According to Morningstar, the volatility of EEMV was 24% lower than the MSCI Emerging Markets Index from its launch in 2011 through June of 2020. That’s impressive.
Fees are also exceptionally low for EEMV; the expense ratio is a meager 0.25%. Perhaps this is due in part to the fund’s low semiannual turnover cap of 10%. Lastly, EEMV has a healthy diversification across market sectors. Take a look at a few below.
EEMV Top Holdings
Financials: 19.90%
Communication: 16.63%
Information Technology: 15.16%
Consumer Discretionary: 11.69%
Consumer Staples: 10.60
5. Invesco S&P MidCap Low Volatility ETF - XMLV
- Benchmark: S&P MidCap 400 Low Volatility Index
- Dividend Yield: 1.28%
- Expense Ratio: 0.25%
- 5 Year Return: 9.82%
- Beta: 0.82
The last fund on our list tackles the mid-cap sector. Invesco’s XMLV is a great way for the risk-averse investor to get relatively low volatility exposure to this sector.
Worth mentioning is the heavy-weight XMLV presently places on the real estate sector. Their 18.69% exposure to real estate stands in stark contrast to the S&P 400 index, which currently has a weight of only 9.5% in this sector.
Though traditionally more stable than equities, the real estate sector is known for its incredibly volatile swings. Many of today’s Real Estate ETFs weren’t in existence during the financial crisis of 2007-2008. One fund that was around during this time was iShares U.S. Real Estate ETF (IYR). Take a look at this image to see how the iShares IYR fund fared during the volatile years of 2007-2008. Not well.
As long as you can stomach the heavy real estate sector weight, IYR seems to be a great option for both a fat dividend and low volatility in the mid-cap sector.
XMLV Top Holdings
Industrials: 18.69%
Real Estate: 17.25%
Material: 12.67%
Utilities: 12.66%
Financials: 9.24%
Additional Resources
