Up more than 23% year-to-date and residing near record highs, the Invesco S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) proves there can be rewards for reducing risk.
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.
“It targets the least volatile 100 stocks from the S&P 500 and weights them by the inverse of their volatility so that the least volatile stocks get the biggest weightings in the portfolio,” said Morningstar in a recent note.
Why It’s Important
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.
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.
“As you might expect, this tends to pull the portfolio toward less volatile stocks like Waste Management and the Hershey Company, which tend to hold up a bit better than most during market downturns,” according to Morningstar. “However, this fund does not consider the correlations across stocks within the portfolio and it does not limit its sector weightings, which can lead to pretty big bets on sectors like utilities and REITs.”
Over the past year, investors have added $3.91 billion to SPLV, good for the best tally among all Invesco ETFs and more than double the inflows to the fund in the second spot on the issuer’s roster.
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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.