Low Volatility, High Dividend ETFs Extinguish So Far in 2022


Invesco’s high-dividend, low-volatility ETF has outperformed the S&P 500 by 26.6% this year

Factor ETFs with defensive characteristics have been the best performers since the start of the year amid soaring inflation, recession fears and geopolitical headwinds.

In the first half alone, the prospect of lower corporate earnings was heightened by Russia’s invasion of Ukraine, which helped Bloomberg’s agricultural sub-index to double, while the price of oil rose. sextupled in less than two years.

In June, investors watched the Federal Reserve’s biggest rate hike in two decades, US consumer prices rose 9% year-on-year as auto loan delinquencies soared and US mortgage rates soared. 30-year-old had posted their biggest one-week jump in 35 years.

Against the backdrop of JP Morgan’s price valuation in a recession with an 85% probability, low volatility and high dividend ETFs have been the best performing factors so far this year, as at the end of the month of June.

Source: MSCI

This success translated into strong returns and inflows for ETFs listed in Europe. For instance ETF feeds April’s ETF, the $440 million Invesco S&P 500 High Dividend Low Volatility UCITS ETF (HDLG), returned 12.7% and saw inflows of $342 million so far. now this year, as of July 29, according to ETFLogic data.

Some of the best-performing low-volatility, high-income US stocks have also easily outperformed US market-cap-weighted benchmarks.

While the S&P 500 fell 13.9% in the first seven months of the year, the WisdomTree US Equity Income UCITS ETF (DHSP) and Invesco S&P 500 Low Volatility UCITS ETF (SPLG) posted returns 15.7% and 5.3% over the same period.

High-dividend ETFs also saw particularly impressive inflows. The two largest ETFs in their class, the $4.5 billion SPDR S&P US Dividend Aristocrats UCITS ETF (SPYD) and the $2.8 billion Vanguard FTSE All-World High Dividend UCITS ETF (VHYL), recorded inflows of $1.1 billion and $1 billion respectively this year. , end of July.

Explaining why these more defensive factors come into their own during times of conflict, Investment Metrics said in a note in May: “We would expect more defensive companies to perform well as the economy slows, as these companies have stronger balance sheets to weather the storm.

“Value, growth and smaller companies, which are more dependent on a stronger economic environment and easier access to finance, are expected to struggle in such an environment.”

Outside of the broad factor plays, other investors have also chosen to go the route of low-beta, high-income ETFs capturing individual sectors.

Proof of this, the three most popular consumer staples ETFs so far this year have welcomed a combined total of $783 million in new assets, while the top three inbound ETFs in the healthcare sector have seen a total of $597 million.

Interestingly, after the two best performing ETFs in the utilities sector posted returns of 17% each in the first seven months of the year, Europe’s largest utilities play, the iShares ETF STOXX Europe 600 Utilities UCITS (EXH9) of $289 million saw an outflow of $247 million in July. , perhaps showing investors that the outperformance of the utilities sector is coming to an end.

It could also be part of the surprise spin that many have experienced in recent weeks, thinking that a recession could serve as a firebreak for inflation and prompt the Federal Reserve to end its aggressive bull cycle.

This bet on a “Powell pivot” by the Fed Chairman and his team is a risky bet, but conducted with conviction with $394 million in the SPDR S&P US Technology Select Sector UCITS ETF (ZPDT) over the past month so that retail investors bought FAANGs at their highest volume since late July 2014, according to Vanda Research.

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