Recent inflows to the Invesco S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) suggests investors want to remain engaged with equities despite a couple of down days due to COVID-19 virus fears and they are doing so while trimming volatility.

SPLV tracks the S&P 500 Low Volatility Index, which is comprised of the 100 S&P 500 members with the lowest trailing 12-month volatility. While the fund is designed to be sector agnostic, it often features large allocations to utilities, financial services, and real estate stocks. Those sectors currently combine for about two-thirds of SPLV’s weight, according to Invesco data.

“Through Feb. 20, 2020, the S&P 500 Low Volatility Index® is up 5.9% compared to a gain of 4.7% for the S&P 500,” said S&P Dow Jones Indices in a recent note. “Equities roared out of the gate in 2020 but a hiccup in late January allowed Low Vol to catch up and eventually overtake the S&P 500. Those who are familiar with low volatility strategies are not surprised. The strategy’s explicit goal is to muffle the magnitude of movements—in both directions.”

Exploring SPLV

The low-volatility ETFs are factor-based strategies that tilt toward companies with a propensity for lower volatility. Different issuers and index providers arrive at a basket of low volatility stocks in varying fashions. Historical data confirm that over long holding periods, the low volatility factor is rewarding for investors.

“By design, Low Vol aims at protection and participation,” according to S&P Dow Jones. “A well-designed low volatility index should go down less when the market is down but also go up less when the market is up. Strong markets are the worst environments for low volatility indices, which generally underperform by the largest margin then.”

Low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.

“The trajectory of strong markets also play a role in Low Vol’s performance. Choppiness tends to be Low Vol’s best friend. (Relatedly, the S&P 500 High Beta Index usually does well in strong markets but in this choppy environment, the index is up only 2.2% through Feb. 20, 2020.),” according to S&P Dow Jones. “Strong markets are generally not times for Low Vol to shine but choppiness often allows Low Vol to close the lag (and occasionally even overtake the lead).”

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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.