Timing the market may be dubious, yet the time might be right to consider ways to rein in portfolio volatility. Launched back in 2017, the VictoryShares US Multi-Factor Minimum Volatility ETF (VSMV) offers exposure to mid and large-cap US stocks in a portfolio seeking to minimize volatility and maximized risk-adjusted return.
That sounds like a good idea given all the cross-currents and market turbulence witnessed this year. By tracking the performance of the Nasdaq Victory US Multi-Factor Minimum Volatility Index before fees and expenses, the fund aims to deliver superior risk-adjusted returns while lowering the overall volatility of the portfolio.
ETF Trends spoke with Scott Kefer, CFA, Senior Portfolio Strategist for VictoryShares and Solutions, to discuss the current state of the economic environment and VSMV. Since the U.S. appears to be in the late stages of the market cycle, Kefer believes VSMV is a viable solution to consider.
“Most of our low/min vol peers focus on a single factor exposure, simply allocating to stocks exhibiting lower volatility metrics than the overall market,” Kefer explained. “VSMV is different. It doesn’t just buy low-volatility stocks, it also looks to narrow the universe of stocks to those with the best prospects. To be eligible for inclusion in the Index, stocks must first be highly ranked in our multi-factor screen.”
Kefer goes on to explain that the proprietary multi-factor model seeks to identify companies with the strongest fundamental profile, with an emphasis on quality, value, and momentum. Therefore, versus its single factor peers, VSMV constructs a low volatility portfolio of companies that also have attractive fundamental profiles. This multi-factor exposure differentiates it from many low-volatility strategies.
Kefer also spoke to why VSMV could be more critical now, explaining how since late last year the low volatility factor has significantly outperformed all others, leading to massive inflows into the category.
“As a result, we’ve also seen valuations for many of these low-vol stocks reach near-record levels. Now more than ever it’s paramount that you combine low-volatility investing with other factors, such as quality and value, to ensure you aren’t chasing this exposure at any price.”
Kefer also reminds us that when a style rotation occurs, it can be sudden and powerful. It’s important to consider how a single-factor min vol strategy may hold up? We believe that many of the narrowly focused min-vol strategies could be set up for periods underperformance.
That’s why the VictoryShares team prefers a broader, multi-factor approach to min-vol investing. In fact, he believes that VSMV merits consideration as a core portfolio holding.
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