“Investing in stocks whose prices have been historically less volatile may deliver a smoother ride during times of market instability. While this may be an effective strategy in certain environments, some of the ETFs may also introduce other risks, such as sector concentrations or valuation risks that can occur as a by-product of a single-factor focus. Look for options that take these risks into account,” Hoyt added.
The low-volatility ETFs were designed to diminish portfolio volatility for investors pursuing long-term growth potential while providing positive exposure to potentially return-enhancing factors like value, momentum, quality and size.
Related: 5 Smart Beta ETFs for Quality Market Exposure
LVUS tries to reflect the performance of the Hartford Multifactor Low Volatility US Equity Index, which tries to outperform a U.S. cap-weighted universe with up to one quarter less volatility over a complete market cycle.
LVIN tries to reflect the performance of the Hartford Multifactor Low Volatility International Equity Index, which is designed to outperform a capitalization-weighted universe of developed (ex-U.S.) and emerging markets with up to one quarter less volatility over a complete market cycle.
Moreover, the indices include other screens, including an optimization process that seeks diversification by applying minimum and maximum weightings of equity securities across a variety of measures, including sector, company, size, and other factors. The optimization process also seeks to avoid unintended factor risks by maintaining neutral to positive exposure to other potentially return-enhancing factors such as value, momentum, and quality at the portfolio level.
For more information on alternative index-based strategies, visit our smart beta category.