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.