LVHD: Another Example Of Low-Volatility ETFs Not Doing Their Jobs


  • LVHD is a low volatility, high dividend ETF that seeks to provide investors with reasonably high and sustainable dividend payments while specifically controlling for downside risk.
  • However, since its inception five years ago, LVHD has significantly underperformed the S&P 500 and failed in its goals of protecting investors from this risk.
  • This article explores the reason why LVHD and other low-volatility ETFs often fail, and what signals investors can look for in order to avoid such traps.

Investment Thesis

The Legg Mason Low Volatility High Dividend ETF (NASDAQ:LVHD) is not a suitable product for those looking to limit downside risk in the event of a market crash. While there is evidence supporting the benefits of using downside risk instead of total risk to build efficient portfolios, LVHD has already shown three times how bad it responds to sudden market corrections. Investors are likely to underperform the market only with slightly better risk metrics and much worse risk-return metrics. This article will explore why a fund with such an appealing marketing pitch has actually delivered these unintended results to its shareholders.

ETF Profile

LVHD tracks the QS Low Volatility High Dividend Index, a custom index with a proprietary methodology. The fund's profile page does not offer many clues as to how it selects its constituents. The main disclosed points are that it screens for profitable companies from the Solactive U.S. Broad Market Index that can pay relatively high and sustainable dividends. Furthermore, it places individual security and sector caps at 2.5% and 25%, respectively, while limiting REITs to an exposure of 15%. Finally, the fund is reconstituted annually, rebalanced quarterly, and has an expense ratio of 0.27%.

LVHD Selection OverviewSource: Legg Mason LVHD Overview

The ETF is reasonably well diversified by sector and has a large-cap lean. Defensive sectors, including Consumer Staples, Health Care, Real Estate, and Utilities, made up about 60% of the fund as of January 31, 2021. About 80% of the fund is in U.S. securities with market capitalizations over $10 billion.

LVHD Sector AllocationsSource: Legg Mason LVHD Overview

There are currently 76 equity holdings and three currency, cash, and derivatives holdings that total 0.77%. The top ten make up 25.91%, which is about the same as the S&P 500.

LVHD Top Ten HoldingsSource: Legg Mason LVHD Overview

In the last 12

This article was written by

The Sunday Investor profile picture
Build sustainable portfolio income with premium dividend yields up to 10%.

I perform independent fundamental analysis for over 850 U.S. Equity ETFs and aim to provide you with the most comprehensive ETF coverage on Seeking Alpha. My insights into how ETFs are constructed at the industry level are unique rather than surface-level reviews that’s standard on other investment platforms. My deep-dive articles always include a set of alternative funds, and I am active in the comments section and ready to answer your questions about the ETFs you own or are considering.

My qualifications include a Certificate in Advanced Investment Advice from the Canadian Securities Institute, the completion of all educational requirements for the Chartered Investment Manager (CIM) designation, and a Bachelor of Commerce degree with a major in Accounting. In addition, I passed the CFA Level 1 Exam and am on track to become licensed to advise on options and derivatives in 2023. In November 2021, I became a contributor for the Hoya Capital Income Builder Marketplace Service and manage the "Active Equity ETF Model Portfolio", which as a total return objective. Sign up for a free trial today! Hoya Capital Income Builder.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Recommended For You

Comments (4)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.