Markets appear sanguine for the time being, but as the March swoon reminds investors, volatility can spike at a moment’s notice. That turbulence is one reason why the low volatility factor remains popular, but investors may want to consider different approaches to the factor, including the VictoryShares US 500 Volatility Wtd ETF (CFA).

CFA tracks the Nasdaq Victory US Large Cap 500 Volatility Weighted Index and starts 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.

While low-vol ETFs may only hold companies that tend to exhibit smaller swings using the factor as a selection, the VictoryShares suite starts 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. The weightings are based on volatility, so you end up with a more balanced and risk-aware approach to investing in the broad market.

Considering CFA

CFA could be a better avenue to low volatility stocks for another reason: it’s lightly allocated to high-yield sectors. For example, the VictoryShares fund devotes just 7.36% of its weight to the utilities sector and its allocations to energy and real estate stocks are barely noticeable.

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.

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.

Another reason CFA is a more compelling low vol idea: it doesn’t forsake growth. For instance, technology is its largest sector weight at almost 17%.

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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.