Victory Capital recently announced that the first three of its VictoryShares volatility weighted ETFs have achieved their three-year track records and earned 5-Star Overall Morningstar Ratings in their respective categories as of July 31, 2017.
The ETFs, which track the firm’s proprietary CEMP volatility weighted indexes, use a rules-based approach to seek to outperform traditional market cap weighted indexing strategies.
CFA and CFO ranked in the top 10% of 1,233 qualified Large Blend funds over three years as of July 31, 2017, while CDC ranked in the top 1% of the 1,100 qualified Large Value funds for that same period.
Traditional market cap weighted indexes are typically dominated by the performance and risk profile of a handful of mega-cap companies. The CEMP volatility weighted indexes address that concentration challenge by weighting the stocks in the index based on volatility (standard deviation over the past 180 trading days), thereby offering broader exposure to the entire market.
Additionally, to be included in the index, a company must maintain four consecutive quarters of positive earnings.
Mannik Dhillon, President, VictoryShares and Solutions, told ETF Trends it’s important to understand some context about the concentration in the cap-weighted market today.
“The 10 largest stocks in the S&P 500 Index by weight are responsible for more than 32 percent of the Index return year-to-date,” Mannik told ETF Trends. “The information technology (IT) sector is disproportionately growing and driving the S&P 500’s performance, representing more than 22 percent of the Index by weight and almost half (44 percent) of its return year-to-date.”
With that in mind, Mannik said VictoryShares thinks that investors should consider diversifying a portion of their portfolios away from market cap weighted indexes.
“Specifically, volatility weighting provides broader, diversified exposure by using risk (as measured by volatility) as a weighting mechanism to drive diversification,” he said. “Unlike equal weighting, which doesn’t take risk into consideration, volatility weighting looks at where the market is assigning more risk and less risk, and then adjusts weights up or down so that each company’s impact is the same.”
Mannik added weighting allocations this way allows all holdings to contribute equally to risk in the portfolio, driving diversification naturally across factors, cap quartiles, etc.