The Invesco S&P 500 Low Volatility ETF (SPLV) recently hit a 52-week high as the Omicron variant caused some concerns in the market heading towards the end of 2021.
Not only is the variant causing investors to seek safety amid the volatile movements, but inflation is also lurking in the background. A hawkish Federal Reserve could foresee raising interest rates sooner than expected after realizing that inflation could last longer than anticipated, debunking the transitory narrative.
In the meantime, investors who want to still capture upside if markets rise, but also have that downside protection, can consider SPLV. The fund avoids concentration risk with the largest holding, Pepsi, not exceeding 1.34% (as of December 5).
The fund, which is up about 16% year-to-date, is based on the S&P 500® Low Volatility Index and 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 S&P 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 re-balanced and reconstituted quarterly in February, May, August, and November.
Capturing a Year-End Rally
As mentioned, SPLV is not all about muting volatility in lieu of lesser gains. The fund is capable of capturing gains when markets rally, and it’s something that certain analysts are expecting before 2021 is over via a Santa Claus rally.
“There is more of a chance for an upside surprise versus downside surprise,” said Mona Mahajan, Edward Jones’s senior investment strategist. “There is still a chance that we get the year-end rally, especially as investors start to look towards 2022.”
A confluence of relatively strong consumer spending, a stronger dollar, an improving economic situation following the start of the ongoing pandemic last year, higher savings rates, and strong corporate earnings growth could also feed into strength for 2022. Globally, improving vaccine trends could also point to rising global growth.
“We still think markets can move forward, can move higher, perhaps not as high as we saw in the last three years, but in line with earnings growth and perhaps [with] a little bit more volatility,” Mahajan said.
“Overall, the bull market still has some legs to go.”
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