Reducing Volatility With Small-Caps Proves Effective

Related: Institutional ETF Ownership Steadily on the Rise

XSLV holds nearly 120 stocks and is dominated by two sectors – financial services and real estate. Those two sectors combine for over 57% of the fund’s weight. Overall, nine of the 11 GICS sectors are represented in XSLV. The universe of small-cap consumer staples and utilities stocks is smaller than the equivalent large-cap space. As such, those sectors are not as prominent in XSLV as they are often are in comparable large-cap low volatility strategies.

“Outside of this speculative segment of the market, the relationship between volatility and returns has been weak. Although it isn’t a strong predictor of returns for most stocks, past volatility is a good predictor of future volatility and downside performance, at least in the short term. This risk reduction is the principal source of low-volatility stocks’ attractive risk-adjusted performance,” according to Morningstar.

For more on smart beta ETFs, visit our Smart Beta Channel.