LVHI: Unconvincing Currency-Hedged ETF

seekingalpha07-25

Franklin International Low Volatility High Dividend Index ETF uses a “stable yield score” to pick stocks outside the U.S.The LVHI ETF shows some characteristics of a value fund, and its portfolio is ...

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Reviews with updated data are posted when necessary. LVHI strategy Franklin International Low Volatility High Dividend Index ETF (BATS:LVHI) started investing operations on 07/27/2016 and tracks the QS International Low Volatility High Dividend Hedged Index. It has a portfolio of 119 stocks and positions in various currencies, a 30-day SEC yield of 4.56% and a total expense ratio of 0.40%. Distributions are paid quarterly. As described by Franklin Templeton, eligible stocks must be in the MSCI World ex-US IMI Index, listed in one of 18 developed countries, profitable over the last 4 fiscal quarters and pay dividends. A “stable yield” score is calculated by adjusting the yield of stocks with price volatility, earnings volatility, local interest rates and withholding taxes on dividends. Weights are calculated to maximize the aggregate stable yield score. Limits are set for constituents (2.5%), sectors (25% in general, 15% for REITs), countries (15%) and regions (50%). The underlying index is reconstituted annually and rebalanced quarterly. The portfolio turnover rate in the most recent fiscal year was 78%. The fund intends to mitigate risks of currency fluctuations for dollar-based shareholders using currency contracts. Hedging positions are usually reset on a monthly basis. The fund is long in USD and short in local currencies of the companies held in the portfolio. The idea is that if holdings from Switzerland (or any other country) gain +10% in CHF (or other local currency), the fund gains +10% in USD on these stocks. If the US dollar becomes stronger, the hedge provides an excess return. However, if the dollar falls, the hedge is a drag. Investors who are not bullish on the dollar, or who seek plain exposure to foreign economies for diversification purposes, would likely be better off with a non-hedged fund. LVHI portfolio This article will use as a benchmark the parent index, represented by iShares MSCI ACWI ex U.S. ETF (ACWX). LVHI invests mostly in large and mega-cap cap companies (about 91% of asset value). The heaviest countries in the portfolio are Japan (14.9%), the U.K. (14.4%) and Switzerland (12.1%). Hong Kong weighs 3%, so direct exposure to geopolitical risks related to China is low. The next chart lists the top 12 countries, representing 94.6% of asset value.   LVHI geographical allocation (chart: author; data: Franklin Templeton.) The heaviest sector is financials, with 23% of asset value. Then, five sectors are almost on par between 10.6% and 11.7%: communication, utilities, consumer discretionary, energy and consumer staples. Other sectors are below 7%.   LVHI Sector breakdown (chart: author; data: Franklin Templeton.) The next table lists the top 10 holdings, representing 31.9% of assets. The heaviest position weighs 3.57%, so the fund is well-diversified and risks related to individual companies are moderate.   Name Weight (%) ISIN Asset Class Currency   ROCHE HOLDING AG-GENUSSCHEIN 3.57 CH0012032048 Equities CHF   NATIONAL GRID PLC 3.46 GB00BDR05C01 Equities GBP   UNILEVER PLC 3.22 GB00B10RZP78 Equities GBP   ENEL SPA 3.19 IT0003128367 Equities EUR   NIPPON TELEGRAPH & TELEPHONE 3.15 JP3735400008 Equities JPY   NOVARTIS AG-REG 3.14 CH0012005267 Equities CHF   JAPAN TOBACCO INC 3.12 JP3726800000 Equities JPY   TOTALENERGIES SE 3.04 FR0000120271 Equities EUR   ZURICH INSURANCE GROUP AG 3.01 CH0011075394 Equities CHF   PEMBINA PIPELINE CORP 2.96 CA7063271034 Equities CAD   Click to enlarge Fundamentals LVHI shows characteristics of a value fund. Indeed, it is significantly cheaper than the benchmark based on valuation ratios, and shows lower growth rates. Moreover, Fidelity and Morningstar classify LVHI in the “Foreign Large Value” category.     LVHI ACWX   P/E TTM 10.4 15.86   Price/Book 1.25 1.83   Price/Sales 0.85 1.55   Price/Cash Flow 5.59 10.07   Earnings growth 16.95% 19.84%   Sales growth % 7.24% 7.49%   Cash flow growth % -2.81% 4.10%   Click to enlarge Competitors The next table compares characteristics of LVHI and three hedged international equity ETFs:  Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF), reviewed here  WisdomTree International Hedged Quality Dividend Growth Fund (IHDG), iShares Currency Hedged MSCI EAFE ETF (HEFA).      LVHI DBEF IHDG HEFA   Inception 7/27/2016 6/9/2011 5/7/2014 1/31/2014   Expense Ratio 0.40% 0.36% 0.58% 0.35%   AUM $1.10B $6.23B $2.76B $6.65B   Avg Daily Volume $7.44M $26.41M $15.89M $53.45M   4 Year Avg Yield 5.81% 6.03% 4.88% 8.00%   Dividend Frequency Quarterly Semiannual Quarterly Semiannual   5 Yr Div. Growth (annualized) 3.02% -26.70% 14.56% 1.96%   Click to enlarge LVHI is the smallest of these funds in assets under management and the least liquid in dollar volume. Yields and dividend growth metrics of all currency-hedged funds must be considered with caution. Indeed, distributions may include gains from the currency positions. The next chart plots total returns since 7/27/2016. LVHI has been the worst performer since its inception. DBEF and HEFA track the same underlying index, which explains why their paths are almost identical.   LVHI vs competitors, total return since 7/27/2016 (Seeking Alpha) LVHI has also lagged its competitors over the last 12 months:   LVHI vs competitors, 12-month total return (Seeking Alpha) Since inception, the share price has gained 21%, outpaced by the cumulative inflation (about 30%, based on CPI).   LVHI vs competitors, price return since 7/27/2016 (without dividend) (Seeking Alpha) Distributions in dollars are impacted by currency rates, and also by gains and losses on currency contracts. As reported on the next chart, they are very variable, which doesn’t match the needs of investors seeking a stable income stream.   Distribution history (Seeking Alpha) Takeaway Franklin International Low Volatility High Dividend Index ETF (LVHI) uses a “stable yield score” to pick stocks outside the US. LVHI shows some characteristics of a value fund. A currency hedge aims at projecting the performance measured in local currencies into a performance in dollars.  LVHI has significantly underperformed other currency-hedged ETFs since inception and annualized distributions show large variations, which is unattractive for income-oriented investors. Like all currency-hedged ETFs, LVHI embeds two bullish bets, on an equity strategy and the USD. Investors who are not bullish on the USD or who seek plain exposure to foreign economies would likely prefer a non-hedged fund.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2454851993"}