It has paid to take on less risk in 2022. The Invesco S&P 500 Low Volatility ETF (SPLV) was down just 4.1% year-to-date through November 25, comparing favorably to the 14% decline for the SPDR S&P 500 ETF (SPY). But unlike the market-cap weighted SPY, the securities inside smart-beta ETFs like SPLV regularly change.
On November 18, the low volatility index behind SPLV underwent its quarterly rebalance and reconstitution to find the 100 least volatile stocks in the S&P 500 Index. Because the low volatility index is unconstrained, the sector exposure relative to the parent index, not just from the prior quarter, is particularly important to be aware of.
The weight toward defensive sectors, including utilities (27% vs. 3% for SPY), consumer staples (22% vs. 7%), and real estate (6% vs. 2.7%) remain elevated, while exposure to cyclical consumer discretionary (3% vs 10%) and information technology (3% vs. 26%) sectors also persisted. However, there are changes to be mindful of.
For example, three consumer staples stocks were added to the low volatility index, along with two industrials. SPLV’s consumer staple holdings include Coca-Cola, Colgate-Palmolive, Hershey and PepsiCo. To make room, the index removed two real estate stocks, two materials, and one utility. Despite the rebalance and a strong performance in 2022, there are still no energy positions and have not been any since May 2020, according to S&P Dow Jones Indexes.
Advisors are often contrasting SPLV with the iShares MSCI USA Min Vol Factor ETF (USMV), a lower volatility ETF peer that is constructed differently. USMV has sector constraints around its November-end semi-annual rebalance. This results in the fund consistently having relatively high exposure compared to SPLV in a large cyclical sector like information technology (22% of assets as of late November), and relatively low exposure to small sectors like real estate (2%) and energy (0.6%).
While USMV has more exposure to consumer staples (12%) and utilities (7.2%) than a broad market fund like SPY, it is limited in its weighting compared to SPLV. Some of the names inside USMV should shift in December, but we expect the sector weights will likely remain relatively stable.
VettaFi asked advisors in early November during a webcast with State Street Global Advisors what their biggest goal for clients was over the next six months. The majority (56%) chose to “mitigate their exposure to market volatility & downside risk,” while another 22% selected to “bolster their portfolios against a recession.” The more offensive approach, to “tax-loss harvest for their benefit,” garnered only 13%.
SPLV and USMV added a combined $5 billion new money thus far in 2022 and are likely to remain popular heading into 2023, as the Fed likely begins to adjust its monetary policies and advisors seek to protect against market volatility.
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