Use LVOL to Protect Against a Likely Recession

October is looking to be a strong month for markets. Though dipping on Monday, the Dow Jones Industrial Average is on track to have its best month since 1976. And while some investors believe this rally is a sign that the Federal Reserve will stick a soft landing, Sandra Testani, vice president of ETF product and strategy for American Century Investments, said that it’s more likely that markets are experiencing a bear market rally, and that “we’re at that 60% likelihood that we will be in or are in a recession.”

“While the last month has been strong, we continue to see that a recession is likely for the U.S. and Europe,” Testani said.

But that’s not all. Testani added that there’s also a “solid chance of stagflation for the future.” So, American Century has been trying to help their clients brace for an extended bear market – rather than assume we’re out of the woods after the S&P’s strong performance in October – and construct their long-term portfolios accordingly.

To prepare for the likelihood of a recession, investors may want to consider the American Century Low Volatility ETF (NYSE Arca: LVOL), which looks to track the market long-term while also offering less volatility, especially in downturns. Benchmarked against the S&P 500, LVOL is an actively managed fund that seeks to offer lower volatility than the overall market by screening for asymmetric, or downside, volatility and investing in companies with strong, steady growth.

The fund looks to reduce volatility at the portfolio level and in its individual securities. The portfolio managers seek to balance returns with risk management by evaluating the individual securities and their place and performance within their sector and overall.

The ETF’s managers use quantitative models to select securities with attractive fundamentals that they expect will provide returns that will reasonably track the market over the long term while seeking less volatility.

When the fund was launched last year, Ed Rosenberg, head of ETFs at American Century, said that LVOL enables “a nimble approach that can adapt to quantitative insights and challenging market conditions.”

LVOL’s portfolio managers aim to deliver market returns in normal markets while losing less in drawdowns by correcting for the shortcomings of low-volatility indexes. “We’re emphasizing strong fundamentals to limit the potential risk of speculative companies with questionable profits,” Rosenberg added. “We’re also expanding risk measures beyond the volatility to capture other downside and balance sheet risks while focusing on volatility at the portfolio level as well as the individual stock level.”

LVOL has an expense ratio of 0.29%.

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