ETF Trends
ETF Trends

As the markets continue on their record trek, investors may consider alternatives to traditional cap-weighted index investments to diminish exposure to overpriced companies, such as a volatility-weighted exchange traded fund strategy.

Mannik S. Dhillon, Head of Investment Solutions, Product, and Strategy with Victory Capital, told ETF Trends in a call. that investors should take on broader exposure rather than those heavy cap-weighted indices since you’re left doubling down on the most expensive stocks.

Traditional capitalization-weighted index funds weight holdings based on their market cap, so companies that have done well also make up a larger weight in the indices, which leaves investors overexposed to yesterday’s outperformers.

Alternative, Dhillon argued that investors should look to alternative index-based ETFs, like the VictoryShares’ line of Volatility-Weighted ETFs. The ETFs “add new money without doubling down on the most expensive stocks.”

For instance, Dhillon pointed to the VictoryShares Emerging Market Volatility Wtd ETF (NasdaqGM: CEZ) as a value play in the current market environment. After the multi-year rally in developed markets, the emerging market equities have been left in the dust and now trade at very cheap valuations – CEZ shows a 13.3 price-to-earnings ratio and a 1.5 price-to-book, whereas the S&P 500 is trading at a 18.7 P/E and a 2.7 P/B.

As a way to diversify potential risks when investing in various markets, notably the emerging markets, the VictoryShares suite is designed to track its proprietary CEMP indexes.

The VictoryShares volatility weighted approach should not be confused with low-vol strategies, which are designed to capture excess returns to stocks with lower-than-average volatility, beta, and/or idiosyncratic risk.

While low-vol ETFs may only hold companies that tend to exhibit smaller swings using the factor as a selection, the VictoryShares suite starts with the broad market and screens for companies with four quarters of positive earnings. Those stocks are then weighted based on their standard deviation over the past 180 trading days. Stocks with lower volatility are given higher weightings and stocks with greater volatility are given lower weightings. Ultimately, all securities that pass the earnings criteria are present, just at different weights.

“Be aware of profitability and exporting to other nations – not always the best,” Dhillon said. “Volatility weightings starts with profitable companies only – not loading up on big exporting countries – more stocks that stick to their own companies.”

Consequently, with the volatility weights, you end up with a more balanced and risk-aware approach to investing in the broad markets.

VictoryShares also offers other broad equity plays, including the VictoryShares US 500 Volatility Wtd ETF (NasdaqGM: CFA), VictoryShares US Small Cap Volatility Wtd ETF (NasdaqGM: CSA) and VictoryShares International Volatility Wtd ETF (NasdaqGM: CIL).

The volatility-weight suit is also comprised of a high dividend category, which helps limit the inherent volatility in higher yielding stocks. The options include VictoryShares US Large Cap High Div Volatility Wtd ETF (NasdaqGM: CDL), VictoryShares US Small Cap High Div Volatility Wtd ETF (NasdaqGM: CSB) and VictoryShares International High Div Volatility Wtd ETF (NasdaqGM: CID).

Additionally, the VictoryShares US 500 Enhanced Volatility Wtd ETF (NasdaqGM: CFO), VictoryShares US EQ Income Enhanced Volatility Wtd ETF (NasdaqGM: CDC), VictoryShares US Discovery Enhanced Volatility Wtd ETF (NasdaqGM: CSF) and VictoryShares Developed Enhanced Volatility Wtd ETF (NasdaqGM: CIZ) shift from a long position to cash position depending on market swings to help investors better manage risk exposure.

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.