Low Volatility Stocks Unusually Inexpensive | ETF Trends

An often-cited downside of investing in defensive sectors, such as consumer staples and utilities, is that stocks in those groups often command above-average valuation due to their attractive dividend yields and below-average volatility traits.

However, the Invesco S&P 500 Low Volatility ETF (SPLV) isn’t richly valued. In fact, the exchange traded fund is home to some stocks that fit the bill as value plays. Investors looking to offset valuation risk in portfolios that are heavily allocated to mega-cap growth stocks and funds could find it compelling.

To its credit, SPLV has gained nearly 8% year-to-date. That’s an impressive showing, considering the ETF lacks exposure to glamorous mega-cap growth stocks. Plus, the fund is delivering when it comes to reduced volatility. Since the start of 2024, SPLV’s annualized volatility is 7.8%, or 340 basis points below that of the S&P 500.

SPLV Credible Bargain Play

If mega-cap growth stocks have looked richly valued for some time, it’s not a stretch to assume the opposite. Data pertaining to the S&P 500 Low Volatility Index – SPLV’s underlying benchmark – confirms as much.

“On a price-to-book, price-to-sales and price-to-earnings ratio, as well as on a composite basis (i.e., a simple average of the three metrics), the S&P 500 Low Volatility Index currently trades at a 21.8%, 38.6%, 16.4% and 25.6% discount, respectively,” noted S&P Dow Jones Indices. “The 25.6% composite discount places the index in the 99th percentile of cheapness relative to the S&P 500 going back to September 2005.”

SPLV’s currently low valuations may be attributable to a ~15% combined weight to the utilities and real estate sectors. High interest rates have pinched those capital-intensive sectors. The speculation that “higher for longer” could be the path pursued by the Federal Reserve has not helped.

However, those two sectors aren’t indictments of SPLV’s overall quality profile. In fact, the ETF’s quality traits are surprisingly sturdy.

“It is interesting to note that, over the past 12 months, the S&P 500 Low Volatility Index was on par with the S&P 500 from a profitability perspective, in addition to demonstrating materially higher earnings and sales growth over the trailing one- and five-year periods,” added S&P Dow Jones.

That comes with the benefit of SPLV’s index typically sporting a higher dividend yield than the S&P 500 – a trait fostered by the ETF’s large weight to higher-yielding, payout-growing consumer staples names.

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