Some of the highest flying stocks have also been among the worst off during the recent market pullback. Instead of relying on traditional market cap-weighting indices that may tilt toward these at risk high flyers, investors can look to exchange traded fund strategies with an alternative approach.
“Volatility weighted – they’re perfect for times where volatility increase for sure, and we look at our ETFs as an alternative to market-cap weighting. As volatility picks up, especially in those top stocks, our approach, which is a risk-weighted approach, tends to benefit the client a little bit better. So what we’re doing is taking a look at not necessarily the size of the company that decide the weight, but the risk that company imparts on the index,” Joe Geary, Regional Sales Director for VictoryShares, said at the Charles Schwab IMPACT 2018 conference.
As an alternative to traditional cap-weighted index funds, investors may considered a risk-weighted approach to better diversify their market exposure. Victory Capital offers its own suite of smart beta ETFs that focus on volatility-based weighting methodology to potentially help investors generate improved risk-adjusted returns.
For example, the VictoryShares US 500 Enhanced Volatility Wtd ETF (CFO), VictoryShares US EQ Income Enhanced Volatility Wtd ETF (CDC) and VictoryShares US 500 Volatility Wtd ETF (CFA) start with the broad market and screens for companies with four quarters of positive earnings. Those stocks are then weighted based on their standard deviation over the past 180 trading days. Stocks with lower volatility are given higher weightings and stocks with greater volatility are given lower weightings. Ultimately, all securities that pass the earnings criteria are present, just at different weights.