Some low-volatility exchange traded funds are doing their job this year, which is to perform less poorly than broad-based funds when the market declines.
For example, the Invesco S&P 500 Low Volatility ETF (SPLV) is essentially flat on the year, while the S&P 500 is down 6.3%. Some low-volatility ETFs are performing even better than that. Just look at the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD), which is up 7.51% year-to-date.
That’s impressive stuff when considering that low-volatility ETFs are designed to deliver less downside capture.
“The bottom line is trend, seasonality, rapid Fed tightening, and the economic cycle do continue to favor SPHD,” wrote Ned Davis Research’s Matt Bauer in a report. “Mind summer weakness and watch for reversals of correlation to the broader market and from potentially overbought conditions as cues to reduce positions or take profits.”
There’s no denying that SPHD has near-term momentum, as highlighted by a 6.43% gain over the past month and the fact that the ETF resides near all-time highs. The right sector exposures are helping.
“According to Factset, about 40% of SPHD’s combined holdings stem from utilities and consumer staples, sectors generally seen as safer bets during periods of rate hikes, rising inflation, and a recession. Another roughly 9% come from energy, a sector that is trading up 45% year to date as oil prices seesaw and is currently the strongest performing sector in the S&P 500 by a longshot,” reports Samantha Subin for CNBC.
To be precise, SPHD allocates 41.67% of its weight to the utilities and consumer staples sectors — two bastions of lower volatility and higher dividends. Real estate and healthcare stocks combine for about 23.6% of SPHD’s portfolio. Putting all that together, it’s not surprising that SPHD has value tendencies. The fund devotes 81% of its weight to value stocks — a favorable trait at a time when value is outperforming.
As CNBC notes, all of SPHD’s top 10 holdings, which range in weights of 2.37% to 3.49%, are higher year-to-date, but there’s more to the story.
SPHD has a distribution rate of 3.51%, indicating that it has some immunity from rising Treasury yields because the ETF’s dividend yield is still well in excess of 10-year Treasury yields. Translation: There’s not much incentive for income investors to ditch SPHD in favor of high-quality, rate-sensitive bonds. SPHD also pays a monthly dividend.
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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.
