In quiet fashion, the VictoryShares US 500 Enhanced Volatility Wtd ETF (CFO) is one of the stars among smart beta exchange traded funds this year. Off its March lows, CFO is higher by 28% and has recently been on a streak of hitting all-time highs.
The $640 million CFO turned six years old last month and tracks the Nasdaq Victory US Large Cap 500 Long/Cash Volatility Weighted Index. CFO can be seen as something as quality meets low volatility play because its components must be earnings positive for at least four straight quarters.
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.
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. The weightings are based on volatility, so you end up with a more balanced and risk-aware approach to investing in the broad market.
Call on CFO ETF
An interesting trait about CFO is that, unlike some rival low volatility strategies, is that the fund isn’t excessively allocated to any one sector. Nor is the fund heavily devoted to traditional low volatility groups such as consumer staples or utilities.
Consumer staples, real estate and utilities are usually seen as the traditional “low vol” groups, but those sectors combine for less than 9% of CFO’s roster, according to issuer data. Alone, technology commands a higher weight in the fund. CFO also addresses some of the limitations associated with cap-weighted funds.
When the going is good, passive market-cap weighted methodologies can help investors ride the markets higher and diversify across a broad market. This also creates an unforeseen risk since the largest components or largest companies by market capitalization are also those that have performed the best. Consequently, investors who are now overweight these big companies in a market cap-weighted fund are exposed to the downside risks when these high-flying stocks suddenly take a turn.
There’s something to CFO’s approach to damping volatility. Year-to-date, the VictoryShares fund is up almost 5% while the S&P 500 Low Volatility Index is down 7.18%.
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