This may provide another argument for an investment solution that has the potential to lower risk.
Reason No. 3: There is a small-cap story:
The dollar has been strong recently, rallying over 11.0% from its May 2014 low, while overseas economic growth has been sluggish.4 The strong dollar and weak international growth suggest multinational companies face headwinds to their profit outlook. Small caps typically have less international exposure than large caps. As proof of relatively weak international growth, the flash eurozone Purchasing Managers Index (PMI) hit a 16-month low of 51.4 in October, while the Chinese flash manufacturing PMI eased 0.4 to just 50.0 in October.4 These numbers come on the back of the Japan’s third-quarter 2014 gross domestic product contracting 1.6%. In contrast, the US October flash PMI was a more vibrant 54.7.4
Reason No. 4: In its current composition, low volatility may be a play on tighter monetary policy:
Although the timing of a Federal Reserve rate hike is debatable, the US labor market is tightening and higher rates could improve the net interest margin and profitability for some financial stocks. Digging into the jobs opening and labor turnover survey from the US Bureau of Labor Statistics, the ratio of job openings to hiring is at survey highs and points to upward pressure on wage growth. A continuation of the trend could put pressure on the Fed to snug rates, which would benefit the financial sector.
Although weightings can change after quarterly reconstitutions, XSLV currently has over 50% exposure to the financial sector and has had material exposure to the financial sector since its inception Feb. 15, 2013.4
Investors interested in learning more about low volatility products can talk with their advisors and visit this page on our website.
1 Bloomberg LP as of Nov. 19, 2014
2 Bloomberg LP as of Oct. 31, 2014
3 Invesco PowerShares and Bloomberg LP as of Nov. 20, 2014
4 Bloomberg LP as of Nov. 20, 2014
Important Information
Volatility measures the amount of fluctuation in the price of a security or portfolio.
Risk-adjusted return measures the amount of return an investment provided relative to how much risk it took on.
Standard deviation is a measure of an asset’s volatility, signifying how much its return varies from the average or expected return. A higher standard deviation indicates a more volatile, and therefore riskier, security.
A basis point is a unit that is equal to one one-hundredth of a percent.