This exactly the type of environment in which investors may be inclined to embrace the low volatility factor. However, traditional strategies adhering to that factor are leaving some investors disappointed this year. Enter the VictoryShares US 500 Volatility Wtd ETF (CFA).
CFA tracks the Nasdaq Victory US Large Cap 500 Volatility Weighted Index and 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.
Proving that old guard low volatility strategies are leaving investors yearning for more, CFA is outperforming the S&P 500 Low Volatility Index by nearly 400 basis points year-to-date.
Improving on a Favored Concept
One way of considering CFA is that the ETF is an improvement on prosaic low vol funds.
One of the primary objectives of low volatility ETFs, such as CFA, isn’t to capture all of a bull market’s upside, but rather to capture less downside when markets swoon. What that means is that a fund such as CFA, if behaving as expected, won’t be immune from equity market retrenchment when stocks decline, but it will fall less during rough periods.
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.
Within CFA, 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. The weightings are based on volatility, so you end up with a more balanced and risk-aware approach to investing in the broad market.
However, that doesn’t mean the fund is excessively allocated to traditional low volatility sectors. In fact, CFA features growth allocations as technology and consumer discretionary names combine for 28% of the ETF’s weight.
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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.