The low volatility factor is being glossed over this year in favor of growth and momentum, but that does not mean opportunity is lost with exchange traded funds such as the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV).
In fact, SPLV and the rival iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) hit new highs on Wednesday. USMV selects stocks based on variances and correlations while SPLV holds the 100 S&P 500 stocks with the lowest trailing 12-month volatility. Additionally, there could be catalysts that could renew investors’ affinity for low volatility ETFs, including the Federal Reserve.
“In addition to its impact on the economy, monetary policy can affect the health of a company’s balance sheet, access to capital and investment opportunities,” said Invesco PowerShares in a recent note. “Historically, there has been about a two-year lag between initial increases in the overnight federal funds rate and equity volatility, as shown in the chart below. Why is this germane now?”
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.