The Invesco S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) is in the midst of an impressive showing this year, trailing the S&P 500 by less than 200 basis points. That’s noteworthy because the strength of low volatility funds is usually borne out in down markets because these products aren’t designed to have 100% upside capture ratios.
The low-volatility ETFs 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.
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. Those sectors currently combine for about two-thirds of SPLV’s weight, according to Invesco data.
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.
What’s Next For SPLV
“In its current rebalance, effective after market close November 15, 2019, more than half of the eight names that left the index came from the Financials sector, scaling back the weight in the sector by 5%. The slack was picked up by Communication Services and Real Estate,” said S&P Dow Jones Indices in a recent note.
Prior to the rebalance of is index, SPLV’s weight to financial services stocks was over 22%, making that the ETF’s second-largest sector allocation behind utilities.
Interestingly, the reason for the decline in the fund’s weight to financial stocks isn’t attributable to a significant jump in volatility for that sector.
“Looking at the trailing one-year volatility for S&P 500 sectors compared to three months ago, there is nothing to indicate that Financials as a group became a lot more volatile,” notes S&P Dow Jones. “The S&P 500 Low Volatility Index targets low volatility at the stock level and for the latest rebalance at least, there seems to be more going on idiosyncratically than at the sector level.”
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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.