When stocks tumbled in the fourth quarter, investors gravitated toward more defensive assets. The low volatility factor and the related exchange traded funds, including the Invesco S&P 500 Low Volatility ETF (NYSEArca: SPLV), can receive renewed attention during periods of elevated equity market turbulence.
SPLV, one of the largest low volatility ETFs, tracks the S&P 500 Low Volatility Index. While different low volatility ETFs use different methodologies, the aim is usually the same: not to capture all of the upside in strong bull markets, but rather to expose investors to less downside when markets falter.
Data suggest SPLV, the Invesco S&P500 Low Volatility ETF (NYSEArca: XMLV) and the Invesco S&P SmallCap Low Volatility Portfolio (NYSEArca: XSLV) did what they are supposed in the fourth quarter.
XSLV takes the securities that exhibit the lowest volatility from the benchmark S&P SmallCap 600 Index. To be precise, XSLV is home to the 120 stocks from the S&P SmallCap 600 that have the lowest trailing 12-month volatility.
Inside The Data
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 last 12 months and weights holdings based on the securities’ inverse volatility, so the least volatile securities have the highest weighting.
Since Oct. 3, 2018, Invesco’s three largest U.S. low volatility ETFs -Invesco S&P 500 Low Volatility ETF (SPLV), Invesco S&P MidCap Low Volatility ETF (XMLV) and Invesco S&P SmallCap Low Volatility ETF (XSLV) – outperformed their S&P benchmarks by 9.08%, 9.69%, and 7.3% respectively. In addition, these funds experienced nearly one-third less volatility than their benchmarks.
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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