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.
They include VictoryShares US 500 Volatility Wtd ETF (CFA), VictoryShares US 500 Enhanced Volatility Wtd ETF (CFO), and the VictoryShares US EQ Income Enhanced Volatility Wtd ETF (CDC).
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.
“In addition, VictoryShares volatility weighted ETFs invest only in profitable companies (as measured by four quarters of positive earnings), potentially eliminating those that might initially be more susceptible to a drawdown during a market correction,” he said.
This focus on diversification through a volatility weighted approach is particularly relevant in light of several external forces in motion today. When you consider today’s geopolitical risks, legislative uncertainty and the fact that very few experts say today’s market is cheap, we think diversified exposure to the market makes a lot of sense.
Related: A Min Volatility ETF That Starts with a Quality Approach
The VictoryShares volatility weighted approach differs from competing methodologies that invest in low volatility companies. Instead, the indexes use volatility as a weighting mechanism to seek to achieve broad-market diversification. Over the past three years, Victory Capital has extended the approach beyond the US broad market to provide investors with volatility weighted solutions that seek to provide exposure to high dividends as well as international and emerging markets.
Beyond the U.S., country and currency concentration and risk can dominate performance in overseas markets, Mannik said.
“Taking a quality view of only investing in what we believe to be profitable companies, and diversifying across them based on how the market has assigned risk, can provide diversification to help navigate developed and emerging markets,” he said.
Mannik said the diversification that volatility weighting delivers not only allows it to serve as a core allocation; it can sit alongside the cap-weighted counterparts in all geographies as a complement as well.
Related: Why ETF Investors Look to Dividend Growth as a Portfolio Diversifier
The VictoryShares ETF platform, which has grown to approximately $1.7 billion in AUM as of July 31, 2017, is designed to provide investors with rules-based solutions that help bridge the gap between the active and traditional passive elements of their portfolios.
In addition to its suite of volatility weighted ETFs, the VictoryShares platform includes two recently launched ETFs: the VictoryShares Dividend Accelerator ETF (VSDA) and the VictoryShares US Multi-Factor Minimum Volatility ETF (VSMV). Both ETFs track indexes developed in partnership with Nasdaq.
Visit www.victoryshares.com for more information.