Truth be told, low-volatility exchange traded funds have been enjoying plenty of moments over the course of 2022. The products are living up to their billing, performing less poorly than the broader market while equities struggle while delivering reduced volatility. There could be more good news on the way for ETFs such as the Invesco S&P 500® Low Volatility ETF (SPLV), as some market observers are forecasting an increasingly favorable environment for low-volatility ETFs. That’s saying something, because the funds are standing out this year.
“So on one hand, we have this seems like inflation has upper hand. It keep coming in hotter than expected. And if the inflation comes in like that, monetary policy will stay tighter for longer, and basically, it will delay, most importantly the Fed pivot. In that environment, stocks that tend to be highly levered, they tend to have volatile profitability and tend to be expensive, they are underperform,” said TD Asset Management portfolio manager Emin Baghramyan in a recent interview.
SPLV, which tracks the S&P 500 Low Volatility Index, is certainly doing its job this year. As of October 31, the Invesco ETF’s year-to-date loss was just 8.4%, or less than half the 17.7% shed by the S&P 500. Plus, SPLV’s annualized volatility through the first 10 months of 2022 is 700 basis points below that of the S&P 500.
“Low- volatility stocks tend to have the opposite characteristics. They tend to be stable. They tend to have stable profit outlook, not very expensive, and not very leveraged,” added Baghramyan.
Indeed, SPLV sports plenty of stability as the utilities and consumer staples sectors combine for about 45% of the fund’s weight. Healthcare stocks contribute another 15%. Conversely, energy — though performing well this year — has a penchant for turbulence and isn’t currently featured in SPLV.
Additionally, as one might surmise, SPLV could be an ideal consideration for investors with long time horizons who simply don’t want to deal with the turbulence that comes along with risk assets.
“So if we look at over the past 40 years, one could argue that, yeah, low-vol stocks have indeed outperformed by about 1.5% each per year, their benchmark, their peers, the broad market average. And over the past 40 years, we indeed had interest rates declining steadily,” concluded TD’s Baghramyan.
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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.