There’s the old joke about having just one job, but in the case of low volatility exchange traded funds, these products have two jobs and those endeavors aren’t laughing matters. ETFs such as the Invesco S&P 500® Low Volatility ETF (SPLV) are designed to be less volatile than traditional equity strategies while performing less poorly than the broader market when stocks decline, as has been the case this year.
On the surface, those aren’t glamorous pursuits, but over the long-term, investors are often rewarded by low volatility strategies by way of reduced drawdowns. Fortunately, SPLV is acting as expected this year, underscoring its status as a credible option for investors looking to maintain equity exposure even in volatile market settings.
“For the entirety of 2022 so far, Low Volatility’s outperformance was much more impressive, declining just 6.1% compared to a loss of 15.6% for the S&P 500. Delivering what the strategy aims at, the low volatility index achieved its 9.5% outperformance with a standard deviation of 18% versus 25% for the benchmark S&P 500,” noted S&P Dow Jones Indexes.
In the above comment, “low volatility” refers to the S&P 500 Low Volatility Index, which is SPLV’s underlying benchmark. That gauge is a collection of the 100 S&P 500 members with the lowest trailing 12-month volatility. The index is rebalanced quarterly in February, May, August, and November, meaning it’s fresh off another reconstitution.
“The latest rebalance, effective after the market close on Nov. 18, 2022, yielded just minor shifts in allocation,” added S&P Dow Jones. “The two sectors that reduced their presence most significantly in the index were Real Estate and Materials, while the index focused more on Industrials and Consumer Staples. While Utilities also lost some ground, it remains the largest sector in the index. Energy stocks, which disappeared from the index in May 2020, have yet to make a reappearance.”
SPLV and its underlying index are designed to be sector agnostic, but history proves some sectors are consistently less volatile than others. Two that certainly check that box are utilities and consumer staples. Those groups currently combine for nearly 48% of the SPLV portfolio.
These days, “less volatile” matters because over the past four months, volatility is higher across all 11 GICS sectors with consumer discretionary and energy being the most egregious offenders. As of Nov. 23, SPLV held no energy stocks while consumer cyclical names represented just 2.97% of the ETF’s weight.
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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.