Investors can avoid disappointment with low-volatility exchange traded funds by remembering an important point: These funds are designed to provide less downside capture when stocks falter, not all 100% upside capture when the broader market soars.
In other words, an ETF such as the Invesco S&P 500 Low Volatility ETF (SPLV) won’t necessarily rise when the broader market falls, but if SPLV is doing its job, it will perform less poorly than broader benchmarks during corrections or bear markets.
SPLV seems to be doing its job, as the Invesco fund entered Thursday with a negligible year-to-date loss, while the S&P 500 was off 12.15% this year entering the April 28 trading session. Add to that, SPLV has also been sharply outperforming the largest low-volatility ETF since the start of 2022.
However, the low-volatility ebullience isn’t confined to SPLV. The Invesco S&P MidCap Low Volatility ETF (NYSEArca: XMLV) is doing its job as well. Entering Thursday, XMLV, which tracks the S&P MidCap 400 Low Volatility Index, was off 1.81% on a year-to-date basis, while the S&P MidCap 400 Index was down 11.15%. In plain English, XMLV is easily one of this year’s best-performing mid-cap ETFs.
Investors are also being rewarded for embracing the combination of high dividends and low volatility.
“Stocks with low volatility and healthy dividends often go hand in hand. Those companies tend to have stable, predictable earnings that can serve as safe havens during market downturns, but they may underperform when investors are expecting an acceleration of economic growth,” reports Jesse Pound for CNBC.
Enter the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD), which is sporting a modest year-to-date gain of 3.78% and delivering monthly dividends. Like SPLV, SPHD isn’t just outperforming the broader market, it’s easily topping its closest competitor. That’s notable because there’s some overlap between SPHD and its rival.
“Some ETFs that focus on less volatile names and stocks with strong dividend yields have outperformed by a healthy margin. In some cases, they have even gained ground,” according to CNBC.
SPHD follows the S&P 500 Low Volatility High Dividend Index, and its advantage in 2022 is clear. The ETF allocates about half its weight to the utilities, consumer staples, and energy sectors — three of this year’s best-performing groups. Conversely, the S&P 500 allocates just 14% of its weight to those sectors.
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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.