Low-Volatility Factor Has Enviable History, Bright Future | ETF Trends

Sometimes, boring is beautiful in the world of investing, and when it comes to accessing boring, the low-volatility factor stands tall. Then again, calling low volatility “boring” may be a slight given the factor’s durable, impressive, long-term track record.

A variety of exchange traded funds provide the required exposure, including the Invesco S&P 500 Low Volatility ETF (SPLV). With its 12th anniversary looming in May, SPLV is one of the seasoned veterans of the low-volatility ETF category, and it remains a relevant consideration today for risk-averse equity investors.

One of the lynchpins of the low-volatility investment thesis is that, over longer holding periods, more volatile stocks don’t always reward investors and the damage done by significant drawdowns can take years for a portfolio to recover from. Strategies such as SPLV can allay some of those concerns.

“Half a century ago, it became clear that investing in higher risk equities is not necessarily rewarded with higher returns. This low volatility anomaly goes against the traditional belief that there should be an extra reward for taking more risk. The anomaly persists to this day,” according to BNP Paribas research.

Due to its over low-volatility advertising, SPLV may not be appealing to some investors because some market participants believe that the more risk that is incurred, the larger the rewards. However, there’s no denying SPLV’s popularity, as highlighted by its $10.21 billion in assets under management. Likewise, as investors rewire their views of risk vs. reward, a fund such as SPLV can take on added allure.

“Intuitively, you would expect high-volatility stocks to offer investors a higher compensation for that increased risk. However, empirical evidence has shown over and over again that this is not the case, in particular over the medium to long term,” added BNP Paribas.

SPLV follows the S&P 500® Low Volatility Index, which is a collection of the 100 S&P 500 components with the lowest trailing 12-month volatility. Other low-volatility ETFs employ different approaches, but the true test of these products is whether they perform less poorly with less volatility than the broader market when stocks swoon.

Using 2022’s forgettable market environment as a barometer, SPLV definitely did its job, declining just 4.9% while the S&P 500 lost more than 18%. Though not nearly as bad as 2022, 2018 wasn’t great for equities, as the S&P 500 declined 4.6% with annualized volatility of 17%. SPLV’s results for that year were a barely noticeable loss of 0.2% and annualized volatility of 12%.

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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.