Most passive index funds don’t have high turnover ratios, but when a fund sports a specific objective – say low volatility – some changes in holdings are to be expected.
It may be of note that following its recent rebalance, the Invesco S&P 500 Low Volatility ETF (SPLV) didn’t experience much in the way of change.
SPLV seeks to invest at least 90% of its total assets in common stocks that comprise the Index. The Index is compiled, maintained, and calculated by Standard and Poor’s and consists of the 100 stocks from the SP 500 Index with the lowest realized volatility over the past 12 months.
Volatility is a statistical measurement of the magnitude of up and down asset price fluctuations over time. The Fund and the Index are rebalanced and reconstituted quarterly in February, May, August, and November.
“The Low Vol index rebalanced after the market’s close on Feb. 19, 2021; not much changed. With the lowest turnover in the history of the index, six names cycled out, accounting for about 5% of the index,” according to S&P Dow Jones Indices. “The biggest change was in Health Care, which gave up 3% of its weight. The slack was mostly offset by Information Technology. Real Estate lost a bit of ground as Industrials added about 1%. All other sectors held steady.”
The Low Volatility Methodology
One of the primary objectives of low volatility ETFs such as SPLV isn’t to capture all of a bull market’s upside, but rather to capture less downside when markets swoon. What that means is that a fund such as SPLV, if behaving as expected, won’t be immune from equity market retrenchment when stocks decline, but it will fall less during rough periods.
“Dynamics in sectors provide us with some insight into what drove the changes in the latest rebalance. While volatility remains elevated, similar to the November 2020 rebalance, it continues to decline. Importantly, volatility declined by a similar proportion across all sectors, which explains the minimal turnover in the latest rebalance,” notes S&P Dow Jones.
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, a notion has been backed by extensive academic research.
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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.