Global asset manager Legg Mason has launched a new smart beta exchange-traded fund targeting exposure to international equities with high dividend yields and low price and earnings volatility.  and a currency hedge for adverse exchange rate movements against the US dollar.

The Legg Mason International Low Volatility High Dividend ETF aims to invest in international companies with sustainable dividend levels by applying a low volatility screen.

The Legg Mason International Low Volatility High Dividend ETF (Bats: LVHI) tracks the QS International Low Volatility High Dividend Hedged Index, which is based on a proprietary methodology created and sponsored by QS, the fund’s subadviser. The index is composed of income-producing equity securities in developed markets outside of the US across a range of market capitalizations that are included in the MSCI World ex-US IMI Index.

The fund may appeal to income-seeking investors preferring equity-based exposure given low interest rates and the risk of bond prices falling if rates rise. While some dividend stocks bring the risk of volatility and payout cuts, the Legg Mason International Low Volatility High Dividend ETF attempts to mitigate this risk by seeking income from sustainable dividends to provide a more reliable income stream, reduced volatility, and the potential for appreciation.

Stocks in the underlying index must have demonstrated profitability over the last four fiscal quarters as a whole, plus only those that have paid or are anticipated to pay a dividend will be eligible for final inclusion. The methodology calculates a composite “stable yield” score, with the yield of stocks with relatively high price or earnings volatility adjusted downward and the yield of stocks with relatively low price or earnings volatility adjusted upward. The underlying index will also take into account foreign withholding taxes on dividend payments to minimize their impact on distribution yield. Constituent weights are calculated to maximize the stable yield score of its index while adhering to single constituent caps of 2.5%, sector caps of 25%, country caps of 15%, and geographical region caps of 50%. Furthermore, the percentage of the index made up of real estate investment trusts (REITs) will not exceed 15%.

Some of the largest constituents to have reached the 2.5% single component cap include Astrazeneca, Toyota, GSK, Telstra, Swedbank, Swisscom, Canon, National Australia Bank and National Grid.

The index applies a methodology to effectively create a “hedge” against fluctuations of foreign currencies against the US dollar by employing a one-month forward contract against the total value of the non-US dollar denominated securities. The hedge is reset on a monthly basis.

As of 29 July 2016 the index has 119 constituents, is up 1.8% year-to-date and 57.6% over the past five years.

Legg Mason has become the 15th issuer to list an ETF on the Bats ETF Marketplace and the eighth to join the exchange this year. Of the eight new issuers to have joined Bats in 2016, a collective 43 ETFs have been launched or switched to the exchange so far in 2016, compared to a total of 30 ETFs for all of 2015.

Rick Genoni, Head of ETF Product Management at Legg Mason, said in a statement: “We look forward to partnering with Bats to list our newest product, the Legg Mason International Low Volatility High Dividend ETF (LVHI). Bats is recognized within the ETF community as being innovative and solution focused, two traits which we believe extend to this product.”

“We are excited to welcome Legg Mason, and LVHI, to the Bats ETF Marketplace,” added Laura Morrison, Senior Vice President, Global Head of Exchange-Traded Products, at Bats. “We view Legg Mason as a very important partner and look forward to growing with them as Bats continues its mission of serving the ETF community.”

The fund has a total expense ratio of 0.40%.

One of the largest ETFs in the US to adopt a high div, low vol approach to security selection is the PowerShares S&P 500 High Dividend Low Volatility Portfolio (NYSE Arca: SPHD) which tracks 50 securities traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. The fund has over $2.5bn in assets under management and charges a TER of 0.30%. The fund is also available as a UCITS-compliant ETF listed on the London Stock Exchange (Ticker: HDLV). HDLV forms part of a range of high dividend low volatility ETFs listed in London which include the:
PowerShares EURO STOXX High Dividend Low Volatility UCITS ETF (EUHD). TER – 0.30%
PowerShares FTSE Emerging Markets High Dividend Low Volatility UCITS ETF (EMHD). TER – 0.49%
PowerShares FTSE UK High Dividend Low Volatility UCITS ETF (UKHD). TER – 0.39%.