LVHI: High Yield, Low Expectations

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Thesis

Franklin International Low Volatility High Dividend Index ETF (BATS:LVHI) whitethorn look for illustration a bully summation to a diversified portfolio of personification seeking vulnerability to overseas dividend-paying stocks. The TTM dividend output is precocious and nan ETF targets low-volatility stocks while attempting to further alteration wide volatility via rate hedging. It besides excludes US stocks and, thus, avoids imaginable portfolio overlapping. But nan fund's features won't alleviate immoderate concerns.

One of them is that there's nary capable grounds to propose that nan output is sustainable. To beryllium fair, however, nan aforesaid applies erstwhile it comes to proving that it is unsustainable. Another rumor is nan consequence of superior erosion. LVHI has been issued for rather a while but has yet to create a value trend. It's only up 7.19% since inception.

Assuming that nan investor would not reinvest immoderate of nan distribution proceeds, they whitethorn bask a precocious dividend output but astatine nan costs of shrinking their main successful nan agelong run.

For these reasons, I judge that an finance successful LVHI would not beryllium prudent correct now. However, a longer way grounds whitethorn alteration my thesis, truthful I intend to support way of this ETF.

What does LVHI Do?

LVHI was issued by Legg Mason Partners Fund Advisor LLC backmost successful 2016 and is listed connected CBOE nether "LVHI". It's co-managed by Franklin Advisers Inc. As of February 14, 2023, nan money had astir $325 cardinal successful assets nether guidance and a regular measurement of astir 82,600. Its disbursal ratio is 0.4%. Now, without getting excessively technical, I'll explicate what this ETF's attack is, truthful nan remainder of nan study makes consciousness to you.

In 1 sentence, LVHI focuses connected non-US equities successful developed markets astir nan world pinch a precocious dividend and debased volatility. Because it attempts to replicate nan capacity of nan LVHINR Index, we'll request to return a look astatine nan latter's methodology.

The action process is arsenic follows:

• The scale screens for stocks wrong nan MSCI World ex-US IMI Index that connection a precocious dividend yield, person been profitable successful nan past 4 quarters, and are expected to stay truthful for nan early 4 quarters based connected nan statement net forecast of analysts (this successful an effort to guarantee a sustainable dividend yield).
• It past calculates a composite "stable yield" score, ranking higher nan stocks that are comparatively little volatile successful their value and net (it measures value volatility utilizing nan regular modular deviation successful nan past 12-month play and net volatility based connected nan realized net of nan past 3 years and nan projected net successful nan upcoming 2 years).
• The "stable yield" people is besides adjusted downward and upward for stocks listed successful countries pinch comparatively precocious and debased liking rates, respectively (in an effort to bespeak nan rate hedging costs).
• Last, nan scale maximizes nan people by calculating nan optimal weights (subject to attraction limits mentioned below, arsenic good arsenic liquidity and turnover criteria).
• Concentration limits: 2.5% for stocks, 25% for sectors, 15% for countries, 50% for geographic regions, and 15% for REITs.

Components are reconstituted annually and rebalanced quarterly. Additionally, vulnerability to overseas currencies is hedged done monthly FX forwards. Currently, nan ETF's largest vulnerability is successful Japan (15.72%) pinch nan U.K. constituting its 2nd largest allocation (12.78%). Additionally, it presently holds 110 stocks, pinch nan biggest vulnerability to Rio Tinto (RIO) (5.93% aggregate allocation) arsenic it's dual-listed (Rio Tinto Ltd. and Rio Tinto PLC), Japan Post Holdings Co Ltd (OTCPK:JPHLF) (2.83%), and Bayerische Motoren Werke (OTCPK:BMWYY) (2.7%).

Performance

Let's statesman our study by concisely examining this ETF's performance. The issuer has a array connected nan fund's webpage that presents LVHI's returns done various clip frames, assuming that each distributions are reinvested:

Franklin International Website

7.02% is simply a decent annualized return since inception, considering nan volatility restraints and nan hedge costs. Mind that nan fund's fees person been accounted for here. But here's nan thing. Some investors whitethorn deliberation that assuming that nan distributions are reinvested is nan correct measurement to analyse nan capacity of a dividend-paying ETF. But it's only correct if it reflects reality.

In reality, if you intend to reinvest each distributions successful nan money to recognize a amended return, why wouldn't you see each sorts of different ex-U.S. developed markets ETFs that don't salary dividends? Obviously, because you don't intend that erstwhile you're willing successful an ETF for illustration LVHI. You're looking for income, not superior growth.

This is why I construe specified capacity tables arsenic misleading for nan purposes of an income-seeking investor. Therefore, I for illustration to isolate dividends from marketplace value data. I judge this is simply a much sober attack pinch an ETF for illustration LVHI that distributes each dividends and superior gains.

LVHI vs. LVHD

Now, it's worthy noting that LVHI is nan world relative of nan Franklin U.S. Low Volatility High Dividend Index ETF (LVHD). LVHD has nan aforesaid strategy but pinch a attraction connected U.S. dividend stocks. If you're astatine slightest partially attracted to LVHI because of nan world exposure, skip this section. But if you're indifferent to that feature, a speedy comparison is successful order...

Based connected LVHD's ~$1 cardinal successful AUM, there's nary uncertainty that location is request for low-volatility dividend-paying stocks pinch a precocious yield. LVHD was issued successful 2015, astir 8 months earlier LVHI did and if you had bought it astatine inception, your position would beryllium up by almost 60%, excluding distributions. LVHI is only up astir 8.4% since its inception date. However, LVHI's distribution output is overmuch higher (and has been for rather a while).

Data by YCharts

If you're attracted by nan superior capacity of nan LVHD, past I propose you publication different SA contributor's recent article connected it for further research. If, however, you person eyed nan higher distribution output of LVHI, past nan adjacent logical measurement is to analyse really sustainable it is...

High Dividend Yield, but Unpredictable

LVHI whitethorn person a TTM 7.7% yield, but distributions person been erratic:

Seeking Alpha

The TTM output is partially based connected that irregularly ample distribution you spot astatine nan extremity of 2022. One would people person nary assurance that their early output connected costs will bespeak nan existent output for long, if astatine all. But we should besides return into relationship that because of nan fund's value capacity (which has been underwhelming since inception), nan output has really not deviated overmuch from nan existent one:

Seeking Alpha

In fact, it ne'er sewage beneath 7% for arsenic agelong arsenic nan ETF has been run. Therefore, I don't person immoderate valid logic to uncertainty nan existent yield's sustainability. At nan aforesaid time, nan way grounds is excessively short to let maine to reasonably corroborate that nan output is sustainable. The aforesaid problem applies to its value performance...

No Long-Term Trend successful Sight

As we said before, nan value capacity of this ETF has been underwhelming. But it's only adjacent that we comparison it pinch nan capacity of its 2 closest competitors; WisdomTree International Hedged Dividend Growth (IHDG) and Invesco S&P International Developed High Dividend Low Volatility (IDHD).

Currently, location doesn't look to beryllium immoderate ETF that follows nan nonstop aforesaid scale aliases astatine slightest nan aforesaid strategy arsenic LVHI. Therefore, to champion construe nan performance, support successful mind 2 things: IHDG doesn't travel nan low-volatility norm for illustration nan different 2 and IDHD doesn't currency-hedge while nan others do.

Data by YCharts

Unsurprisingly, IHDG outperformed LVHI by a awesome margin. Since LVHI's inception (as it's nan youngest ETF of nan 3 above), its value accrued by 7.19%, while IHDG returned almost 50% and IDHD is down by 3.88%. This flattish value capacity is why I don't judge that LVHI will sphere your superior successful nan agelong tally if you don't reinvest immoderate information of nan distributions. A much defined inclination could person alleviated this concern. The way grounds isn't excessively short, but nan 2020 clang doesn't thief here. All I tin presume is simply a slow declining price. On nan agleam side, each different high-yielding ETF's value inclination is southbound. This ETF's value isn't. So, I would beryllium willing to support way of LVHI successful nan agelong term.

Risks

Let america now summarize nan risks:

Concentration Risk

LVHI presently has a 5.93% portfolio vulnerability to Rio Tinto and this is problematic for its output arsenic location isn't immoderate well-defined distribution inclination connected Rio Tinto's part:

Seeking Alpha RIO Dividend History Page

The aforesaid goes for Japan Post Holdings Co., Ltd. to which LVHI has a 2.83% exposure:

JPHLF Dividend History Page (Seeking Alpha)

Its third-largest holding is Bayerische Motoren Werke pinch a 2.7% allocation and it excessively falls short erstwhile it comes to distribution predictability:

Seeking Alpha BMWYY Dividend History Page

Though I deliberation that LVHI's scale does good to measurement dividend stableness based connected profitability, a defined inclination of increasing dividends is an important criterion that would thief maine disregard nan ample vulnerability to these 3 stocks.

Unsustainable Dividend Yield

Because nan distribution history doesn't coming immoderate inclination of expanding distributions, I americium inclined to deliberation that there's a threat nan existent output won't beryllium sustainable. It's existent that nan dividend output has been precocious since inception, but nan way grounds is short. A increasing distribution inclination exhibits much assurance than a steadily precocious yield. To disregard nan deficiency of nan first, I would request a longer clip framework for nan latter.

Principal Erosion

As you noticed above, nan value capacity grounds of LVHI doesn't supply america pinch a trend. Coupled pinch nan truth that nan capacity has been flattish since nan fund's inception, this is simply a bully logic to judge that nan consequence of a shrinking main is high. This is simply a problem that afflicts galore high-dividend ETFs. With most, however, nan value has been successful a dependable diminution for years. LVHI doesn't person that. So though I whitethorn person my doubts regarding this ETF's expertise to sphere my capital, I cannot disregard it that easily. For this reason, I intend to support way of this ETF's performance.

All successful all, little vulnerability to companies pinch unpredictable distribution maturation and a longer way grounds whitethorn thief maine go bullish connected LVHI. For now, I can't urge it for inclusion successful anyone's portfolio.

Verdict

Theoretically, this ETF would activity good arsenic a constituent of a dividend portfolio that seeks vulnerability to overseas developed markets. In practice, however, I don't person immoderate bully logic to judge that it will. Given nan uncertainty regarding its value capacity and dividend yields, I don't deliberation an investor looking for a unchangeable dividend and superior preservation astatine nan aforesaid clip should beryllium willing successful LVHI correct now. But you whitethorn person a logic to deliberation otherwise. So, please, time off a remark beneath to stock your sentiment pinch me.

I would besides emotion to cognize your thoughts connected this article! I'll make judge to reply each comment.

I americium a self-taught worth investor willing successful communal stocks and ETFs. I americium ever connected nan lookout for opportunities that whitethorn safely turn my status money while producing alpha.My extremity present is to supply investors pinch study that transparently communicates my thoughts connected nan securities I screen from nan POV of my ain superior allocation needs.