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Two dividend ETFs to weather a recession

Two dividend ETFs to weather a recession
Dino Kurbegovic

Investors fearful of things getting much worse in an already challenging year for markets can find some solace in diversification. As individual stocks can carry a lot of risks, diversification plays could come in the form of exchange-traded funds (ETFs), which come in various shapes and sizes to suit every investment style and risk appetite. 

In 2022 numerous risks reared their head, such as the war in Ukraine, renewed lockdowns in China, which stressed the already frail supply chains, rising inflation, and aggressive Federal Reserve (Fed). All of these developments led to the S&P 500 dropping over 20% and entering bear territory. 

Following these developments, Finbold identified two dividend ETFs, which could help investors weather a possible recession. 

Legg Mason Low Volatility High Dividend ETF (NASDAQ: LVHD)  

On the whole, in a bear market, investors usually seek out low-volatility assets; this approach is what LVHD is all about. The fund invests in stocks with low volatility, which should limit the downside in a down market, but also focus on income through dividends. Roughly, the fund balances between 50 to 100 holdings, including small-cap stocks in its portfolio. 

The paradigm for picking the portfolio revolves around fund rebalancing and no stock accounting for more than 2.5% of the fund, with sectors also capped at 25%, except the real-estate investment trusts (REITs), which are capped at 15%. The only downside is that the fund tends to perform poorly once bulls take over in the market. Meanwhile, the fund pays out a 2.7% dividend yield each quarter, or $0.262 per share.  

Currently, LVHD is down 8.5% year-to-date (YTD) compared to the S&P 500, which is down 20.99% YTD. Meanwhile, in the last five days, the price action led to the stock dropping below all daily Simple Moving Averages (SMAs), with the price bouncing off of the October 2021 support at around $36.    

LVHD 20-50-200 SMA lines chart. Source. data. See more stocks here.

Vanguard High Dividend Yield ETF (NYSEARCA: VYM)

VYM as a fund is unique in that the annual turnover ranges between 10% and 15%, which is lower than the average, while the fund pursues yield while mitigating risks. Stocks in its portfolio are weighted by market cap, steering the fund towards large-cap, stable stocks with stronger dividends. 

Currently, the fund holds 443 assets, with 23% of them being in the top 10 blue-chip stocks, such as Coca-Cola (NYSE: KO) or Procter & Gamble (NYSE: PG). 

The median market cap of stocks in its portfolio is $131.7 billion, and the fund has roughly $55.8 billion in total assets. Meanwhile, the fund distributes $0.662 per share each quarter, making its dividend yield 3.04%

VYM top 10 holdings Source: Morningstar 

Moreover, the fund is down over 8% YTD, while a double top pattern has been noted on a daily chart, possibly indicating a reversal of the current trend. Now, shares are below all daily SMAs, bouncing off the September 2021 support at around $102. 

VYM 20-50-200 SMA lines chart. Source. data. See more stocks here.

Investors building their portfolios with ETFs are usually well diversified; however, adding funds that focus on income and avoid volatility could add an additional layer of defense during volatile markets. 

Currently, the two funds mentioned above are living up to their names and limiting the downside to 8%, while the S&P 500 lost over 20%, generating income to help investors sleep better at night.  

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk. 

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