The shake up in the markets this year has caused many investors to take a second look at their portfolios and consider alternative strategies like factor-based ETFs to diversifying holdings.
“I think one thing that is always important in investing, in building portfolios is diversification. So you can’t lose this opportunity that we’ve seen lately to probably step back and look at where, maybe, there are some opportunities from a valuation perspective, factor diversification perspective and maybe just a different way of doings things – active versus passive; things like that,” Mannik Dhillon, President of VictoryShares & Solutions for Victory Capital Management, said at the Charles Schwab IMPACT 2018 conference.
As a way to help investors cope with potential market swings, VictoryShares has come out with its own suite of smart beta ETFs that focus on volatility-based weighting methodology to potentially help investors generate improved risk-adjusted returns.
For example, the VictoryShares US 500 Enhanced Volatility Wtd ETF (CFO), VictoryShares US EQ Income Enhanced Volatility Wtd ETF (CDC) and VictoryShares US 500 Volatility Wtd ETF (CFA) start 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 ETFs shift from a long position to cash position depending on market swings to help investors better manage risk exposure. When the ETF is less than 100% allocated in stocks or bonds, assets are invested in cash or 30-day T-bills. The reallocation process is rules-based and determined based on month-end index values.
For more market-related commentary from Tom Lydon and other industry experts, visit our ETF Trends video category.