More than eight months into 2016, it is fair to say the low volatility factor and the relevant exchange traded funds have been hot and rewarding investors. The same can be said of mid-cap stocks and ETFs. Fortunately for conservative investors, those themes meet in the PowerShares S&P MidCap Low Volatility Portfolio (NYSEArca: XMLV).
XMLV tracks the performance of the S&P MidCap 400 Low Volatility Index, which tracks 80 of the least volatile stocks from the S&P MidCap 400 Index over the past 12 months and weights holdings based on the securities’ inverse volatility, so the least volatile securities have the highest weighting.
Related: An Attractive Mid-Cap Value ETF Play
The low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.
“Despite its hunger for stability, PowerShares S&P Midcap Low Volatility ETF has actually outperformed the S&P 400 midcap index. From its inception in February 2013, the fund is up an average annual 16.5% compared with a nearly 14.1% rise for the S&P 400 MidCap index. The S&P 500’s gain has averaged about 12% in the past three years,” reports Investor’s Business Daily.[related_stories]
Still, he chances of the strategy falling off ahead is more likely. Nevertheless, there is a chance of a more serious market plunge, which could cause the min-vol strategy to shoot up, with valuations growing to a much higher premium.
Supporting the low-vol performance, MSCI pointed to beta, the degree to which stocks tend to move in the same direction as the market, along with dividend yields. Low-vol ETFs have been strengthening this year as they limited downside risk when the markets slipped and strengthened on increased defensive bets during turbulent times.
About half of XMLV’s lineup “is invested in insurance companies, real estate investment trusts and other financials. Utility (a sector known for steady performance), industrial, materials, high-tech, consumer and health care stocks make up smaller portions of the portfolio,” according to IBD.
Other smart beta mid-cap ETFs include the First Trust Mid Cap Core AlphaDEX Fund (NYSEArca: FNX). The fund selects stocks from the S&P 400 Index, but chooses stocks based on growth factors, sales to price and one year sales growth, along with value factors like book value to price, cash flow to price and return on assets.
For more information on the low-vol strategy, visit our low-volatility category.
PowerShares S&P MidCap Low Volatility Portfolio
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.