Serenity Now: Calming the Chaos with Low Volatility High Dividend ETFs

The uncertainty surrounding trade policy has fueled volatility in equity markets year-to-date, leading to significant market swings. Against this backdrop, our Low Volatility High Dividend ETF suite, which launched in Canada in March 2024, has been put to its first real test. We’re pleased to see that so far, it has performed exactly as expected, demonstrating resilience in a turbulent environment.

Executive Summary

• Franklin International Low Volatility High Dividend Index ETF (FLVI) has generated remarkable performance since inception against its benchmark with attractive yield and valuations.
• Franklin U.S. Low Volatility High Dividend Index ETF (FLVU) has delivered excellent defense during volatile periods to highlight why this needs to be part of portfolios today.
• Franklin Canadian Low Volatility High Dividend Index ETF (FLVC) priced at 15-bps, has the core element of the Canadian equity market with evergreen characteristics gaining strong flows.

FLVI - International All-star

Developed international equity markets had a promising start to the year as the MSCI EAFE Index finished ahead of the S&P 500 Index during the first quarter. The valuation gap between the two markets has been topical for years, and investors are taking notice of opportunities outside of North America.

While valuation metrics can be unreliable indicators of short-term market performance, they often present intriguing opportunities for long-term investors. Developed international markets appear attractively priced and hard to overlook relative to the U.S. based on the historical valuation differential between two markets.

Franklin International Low Volatility High Dividend Index ETF (FLVI) has been very popular with clients seeking an international equity strategy to generate alpha in the current environment, with an attractive yield and valuations. FLVI’s P/E currently sits below 10x on a forward basis and yields over 6%!

Source: Bloomberg L.P. and FactSet as of March 31, 2025. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. BEst refers to Bloomberg Estimates for forward 12-months.

Despite its relatively short track record, FLVI has demonstrated exceptional performance, bolstered by its integration of earnings and volatility measures—distinguishing it from traditional high-dividend strategies that may focus solely on dividend yield. The strategy also takes into account country-specific withholding taxes on dividends in an attempt to maximize distribution yield.

Source: Morningstar Research Inc., as of March 31, 2025. All returns in CAD. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. The Common Inception period is March 28, 2024 to March 31, 2025. Time periods greater than one year are annualized.

FLVU – Less Drama, More Yield!

With recent headlines broaching the onset of a possible rotation out of mega cap growth stocks, investors are wondering how to position their portfolio given the large swings in the market. This is a table that I built to illustrate the performance since the inception of this strategy, highlighting how FLVU performed during some key periods of volatility.

Source: Morningstar Research Inc., as of March 31, 2025. All returns in CAD. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. The Common Inception period is March 28, 2024 to March 31, 2025.

Additionally, FLVU has a higher allocation to mid-cap and small-cap stocks compared to both the S&P 500 Index and the Russell 3000 Index (benchmark), offering diversification by market cap. This value tilt, with no exposure to growth stocks, makes FLVU an excellent complement to market cap-based and growth strategies.

Source: Morningstar Research Inc., as of March 31, 2025. All returns in CAD. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. The Common Inception period is March 28, 2024 to March 31, 2025. Time periods greater than one year are annualized.  

FLVU has cheaper valuations compared to its benchmark, which addresses valuation concern of the U.S. equity market. Furthermore, it also provides 241-bps of additional yield compared to the benchmark for clients who are seeking income.

Source: Bloomberg L.P. and FactSet as of March 31, 2025. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. BEst refers to Bloomberg Estimates for forward 12-months.

FLVU's defensive sector weights and robust dividend yield relative to market-cap-based indices offer an appealing counterbalance to the concentration in the top weights in the U.S. equity market. FLVU has proven itself to be resilient, doing well during the sell-off periods, including those related to Magnificent 7 stocks. As a result, we think it has successfully demonstrated why it deserves to be part of portfolios today.

Source: Bloomberg L.P. as of March 31, 2025. All returns in CAD. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. The Common Inception period is March 28, 2024 to March 31, 2025. Time periods greater than one year are annualized.

FLVC – A True North Staple

The relative outperformance of the S&P 500 Index compared to the S&P/TSX Composite Index since 2011 is noteworthy. Given current market valuations and expectations, could this present an opportunity for a reversion trade, and present opportunities for the Canadian equity market?

Given a lot of uncertainty at the moment related to tariffs, having higher quality and lower volatility exposure seems strategically important in the current environment of uncertainty. FLVC has a noticeably higher yield, better quality based on Return on Equity and Free Cash Flow Yield, and cheaper valuations relative to the S&P/TSX Composite.

Source: Bloomberg L.P. and FactSet as of March 31, 2025. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. BEst refers to Bloomberg Estimates for forward 12-months.

Among the suite, FLVC has stood out, attracting strong flows and demonstrating its value in the Canadian market to balance the strong cyclical sector bias. With a competitive 15-bps management fee, we believe it’s a great choice for investors seeking quality, income, and stability.

Source: Morningstar Research Inc., as of March 31, 2025. All returns in CAD. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. The Common Inception period is March 28, 2024 to March 31, 2025. Time periods greater than one year are annualized.  

Final Word

Market dynamics evolve, and smart beta strategies must adjust accordingly. Franklin’s Low Volatility High Dividend Index ETFs exemplify a smarter approach. Rather than simply screening for high dividends, it also evaluates profits – both backward- and forward-looking – to ensure dividends are sustainable. Additionally, it incorporates price and earnings volatility, as stable earnings are essential for maintaining dividend payments over time.

Moreover, given that these are rule-based strategies, there are always guardrails in place to reduce idiosyncratic risks associated with single securities. In FLVI, for instance, we implement concentration limits across regions, countries, sectors, and individual securities to ensure diversification and mitigate excessive exposure. Investors can have confidence that these controls are in place to maintain balance and stability within the portfolio.

I want to thank all our partners and clients that supported these products over the past year, especially colleagues from various ETF research teams that highlighted these strategies with their clients. And if you’re interested in building an equity portfolio that truly looks to provide steady growth through all market cycles, I encourage you to check out our suite.