Among smart beta ETFs dedicated to individual investment factors, low volatility products have been popular with conservative investors based on the premise that emphasizing a low volatility strategy can help reduce a portfolio’s downside potential.
Sector exposures matter with low volatility and, not surprisingly, many of these funds feature defensive tilts. SPLV features light allocations to some of the most volatile sectors, such as consumer discretionary and energy, while featuring large weights to docile groups like utilities and real estate.
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.
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