With the COVID-19 outbreak weighing on riskier assets, investors are returning to a familiar strategy: low volatility. That’s bringing significant inflows to the related ETFs, including the Invesco S&P 500 Low Volatility Portfolio (NYSEArca: SPLV).
SPLV tracks the S&P 500 Low Volatility Index, which is comprised of the 100 S&P 500 members with the lowest trailing 12-month volatility. While the fund is designed to be sector agnostic, it often features large allocations to utilities, financial services, and real estate stocks.
From Feb. 14 through Feb. 21, investors added $1.21 billion to SPLV, more than any other ETF over that period.
Investors need to understand the nature of how these funds work within their current portfolios versus using them as their sole exposure to the markets.
One of the cornerstones of SPLV and other low volatility strategies is to decline less than the broader market when stocks retreat. It’s a small time frame, but last week, SPLV lost just 0.16% compared to a 1.06% decline for the S&P 500.
Sizing up SPLV
Many investors think that due to SPLV’s low volatility directive, the fund is always chock full of consumer staples and utilities stocks. While those are well represented in the fund, other groups are, too, and some upcoming sector changes to the S&P 500 Low Volatility Index could surprise investors.
SPLV currently allocates 29.07% of its weight to utilities stocks, underscoring defensive positioning, but a beneficial one at that as utilities have been one of this year’s best-performing sectors.
Utilities are typically seen as a defensive sector or a more steady area of the market to ride out the volatility. These companies typically offer the most fundamental necessities, such as food, water, and shelter, or are closely related to the energy required to refrigerate food, heat up water and light up a house.
The sector also provides a steady dividend, providing investors with a bond-esque income return. Furthermore, in a lower-for-longer interest rate environment, the yields on utilities makes them that much more attractive to income-minded investors.
Low-volatility ETFs, such as SPLV, are factor-based strategies that tilt toward companies with a propensity for lower volatility. Different issuers and index providers arrive at a basket of low volatility stocks in varying fashions. Historical data confirm that over long holding periods, the low volatility factor is rewarding for investors.
For more on core investing strategies, visit our Core ETF Channel.
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.