Results Aren't Perfect, but Low Vol ETFs Are Doing Their Jobs

Finding shelter from the recent market storm is becoming increasingly difficult, but some low volatility ETFs are proving to be less bad this month compared to broader equity strategies.

For example, the Invesco S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) entered Wednesday with a month-to-date decline of 9.41% while the S&P 500 was lower by 13.18%.

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.

“The outperformance of low-volatility stocks goes further back as well,” reports Evie Liu for Barron’s. “The group has been holding up relatively well since the stock market stumbled into its current highly volatile phase two weeks ago. As of Tuesday, the S&P 500 had gained or lost at least 3% over nine of the past 12 trading days and declined 13.6% through the entire period. During the same period, the Invesco Low Volatility ETF has lost only 10.7%.”

Working As Expected

One of the primary objectives of low volatility ETFs, such as SPLV, isn’t to capture all of a bull market’s upside, but rather to capture less downside when markets swoon. What that means is that a fund such as SPLV, if behaving as expected, won’t be immune from equity market retrenchment when stocks decline, but it will fall less during rough periods.

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.

“Low-volatility is historically a risk-off strategy, with large exposure to defensive sectors such as utilities and real estate. Nine out of the top 10 holdings in the Invesco fund are utility stocks,” according to Barron’s. “The group is, therefore, less affected by the ups and downs of the business cycle, and tends to beat the market during downturns, while underperforming during rallies.”

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.

For more on core investing strategies, visit our Core ETF Channel.

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.