Stocks posted their third consecutive quarter of negative returns, as the Federal Reserve’s aggressive raising of interest rates has adversely impacted equity valuations. And the most recent jobs report has led stocks to tumble further, signaling that investors expect the Fed to continue its hawkish approach to curbing inflation. This in turn has led investors to be more risk-averse and turn towards more low-volatility strategies. In fact, State Street Global Advisors reported that low volatility equity ETFs saw a record $4 billion of inflows in September.
“[S]trong inflows into low volatility funds reflect the most dominant buying behavior trend right now: de-risking,” according to SSGA. “Until market volatility abates (a strong expectation given the confluence of risk flash points, both macro, and micro) this trend is unlikely to slow. Net sector outflows, some defensive sector inflows, and more flows into low volatility factor funds than into sector funds likely will continue.”
Investors looking to get less whipsawed by volatile markets 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 as well as investing in companies with strong, steady growth. It looks to reduce volatility both 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 fund’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 in an effort to limit potential risk of speculative companies with questionable profits,” Rosenberg added. “We’re also expanding risk measures beyond 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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