Enhance, Diversify a Portfolio with Smart-Beta ETFs

Traditional market capitalization-weighted index funds dominate the investment landscape, but they overweight the largest names, potentially exposing investors to greater risks. Investors, though, can look to alternative or smart beta index-based exchange traded strategies to diversify a portfolio and potentially generate improved risk-adjusted returns.

For example, Victory Capital offers a line of 11 volatility-weighted ETFs under its VictoryShares suite that are designed to track its proprietary CEMP indexes.

“The only free lunch left is diversification,” Mannik S. Dhillon, Head of Investment Solutions, Product, and Strategy with Victory Capital, told ETF Trends in a call. “When using a volatility weighting methodology, you end up with more diversified exposure across the broad market.”

The VictoryShares volatility weighted approach should not be confused with low-vol strategies, which are designed to capture excess returns to stocks with lower-than-average volatility, beta, and/or idiosyncratic risk.

“We are different than low-vol,” Dhillon said, explaining that 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,” Dhillon added. “Cap-weighted indexes can provide a false sense of diversification.”

Along with its line of volatility-weighted ETFs, Victory Capital is also planning on expanding its lineup as the firm develops ETFs that track indices developed in partnership with Nasdaq. According to a recent Securities and Exchange Commission filing, Victory Capital is working on the VictoryShares US Multi-Factor Minimum Volatility ETF, VictoryShares Global Multi-Factor Minimum Volatility ETF, VictoryShares International Multi-Factor Minimum Volatility ETF, VictoryShares Dividend Accelerator ETF, VictoryShares Quality Growth ETF and VictoryShares Quality Value ETF. No ticker symbols have been provided yet.

“Investors are demanding even greater choice when seeking to diversify beyond traditional active management or to improve upon cap-weighted indexing,” David Brown, Victory’s Chairman and Chief Executive Officer, said in a note.

“The VictoryShares platform is designed to provide investors with rules-based solutions that bridge the gap between the active and passive elements of their portfolios,” Dhillon said. “As investor behavior continues to evolve away from style box investing into factor- and risk-based investing, VictoryShares will serve as building blocks for next-generation portfolios.”

ETF investors interested in the volatility weighted approach to help smooth out swings in various market segments have a number of options available through the VictoryShares platform. The Victory CEMP ETFs were recently renamed to adopt the VictoryShares brand. They continue to track the CEMP indexes. Ticker symbols have not changed.


– VictoryShares US 500 Volatility Wtd ETF (NasdaqGM: CFA)