ETF Watch: PowerShares Debuts 2 Low Vol, High Div Funds

December 01, 2016

Today Invesco PowerShares rolled out two new ETFs that serve as complements to the firm’s $2.7 billion PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD), which launched in October 2012. The PowerShares S&P International Developed High Dividend Low Volatility Portfolio (IDHD) and the PowerShares S&P SmallCap High Dividend Low Volatility Portfolio (XSHD) both come with expense ratios of 0.30%.

The two funds are listed on the Bats exchange. Bats Global Market is the owner of ETF.com.

Low-volatility, high-dividend strategies have been getting a lot of attention lately, with Legg Mason also rolling out its own similar strategies. Its U.S.-focused Legg Mason Low Volatility High Dividend ETF (LVHD) launched at the end of 2015 and has some $106 million in AUM. The firm has since debuted additional funds using the same strategy but targeting developed and emerging non-U.S. markets. However, low-volatility and high-dividend features have been incorporated into a wide variety of funds that have launched in the last few years.

“There seems to be some value to using low volatility to screen out the bad apples or avoid the value trap,” said Nick Kalivas, senior equity product strategist for PowerShares.

Limiting Risky Stocks

“I think if you look at SPHD, it was able through the volatility screen to eliminate a number of riskier stocks, which, if they had been included, would have pulled down the return. Low volatility is a real-time, objective way to figure out if a company is stressed and if they are going to be able to sustain their dividend,” he added.

IDHD’s index is derived from the S&P EPAC Ex-Korea Index. The methodology first selects the 300 highest-yielding ETFs over the past one-year period from the broad index, and from that, selects the 100 stocks with the lowest volatility over the preceding one-year period. Constituents are weighted by their dividend yield, with weighting constraints at the sector and country levels to ensure diversification.

XSHD’s index is derived from the  S&P SmallCap 600 Index and uses a similar approach. However, it ultimately only includes 60 securities. Sector weights are capped at 25% for the sake of diversification.

Both underlying indexes weight individual components at between 0.5% and 3% of the total benchmark.

Kalivas thinks the high-volatility, low-dividend approach’s benefits really play out in the small-cap space, in particular. Investors tend to seek out that space for its growth potential and the risky nature of the stocks, but companies that pay large dividends aren’t really growth-oriented, he notes. Plus, the low-volatility screen helps to “flush out the low-vol anomaly,” he added.  

Kalivas says he believes the strategy “is really suited for all types of environments for investors who are dividend seeking and on the risk-averse side.”

Contact Heather Bell at [email protected].

 

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