Timely ETF Strategy for Investors to Limit Equity Risk

“The multi-factor model alone produced better performance with lower volatility than the S&P 500,” according to a Nasdaq OMX research note. “After running the securities with their multi-factor composite scores through the optimizer, the historical results show how applying an optimization process allowed for even better performance while limiting volatility.”

In contrast, other popular low-vol ETF strategies only select and weight companies that exhibit the least volatility from a broader benchmark like the S&P 500. However, VSMV takes the initial first step of screening for smart beta factors like momentum, quality, value and growth before incorporating an optimization tool to weight individual securities to minimize absolute volatility.

Other low-vol strategies don’t put their initial input into consideration and just start with the broad equities market. On the other hand, through a better starting universe of securities to select from, an investor can potentially gain exposure to a better optimized portfolio.

“The combination seeks alpha from the multi-factor screen, and lower volatility stemming from the optimized portfolio construction,” according to Nasdaq OMX. “This results in a portfolio designed to participate in rising or bull markets, while outperforming during periods of heightened volatility or bear markets (best illustrated in the up/down market-capture ratio of the Index). Ultimately, the Index aims to provide superior risk-adjusted returns and a smoother path to long-term capital appreciation.”