The recent market correction reminded investors that market volatility can swiftly knockdown a bullish run. Consequently, investors should consider incorporating an exchange traded fund strategy to limit potential downside risks.
For example, the VictoryShares US Multi-Factor Minimum Volatility ETF (NasdaqGS: VSMV) follows a two-step approach to improve upon the process used by other minimum volatility ETF offerings available today. The ETF has the potential to enhance returns and then optimize the portfolio with the aim of reducing volatility, whereas many minimum volatility strategies focus solely on the latter step.
The underling index “offers a next-generation approach to low-volatility investing,” according to Nasdaq OMX. “It seeks to provide a smoother path to long-term capital appreciation. The Index employs a two-step approach that aims to deliver superior risk-adjusted equity returns.”
In the first step, a multi-factor process is utilized to screen for the best securities in the US marketplace. The strategy first starts with a universe of mid- and large-cap U.S. companies taken from the Nasdaq US Large Mid Cap Index and then ranks the companies using a number of proprietary fundamental factors like dividend yield, sales growth and other financial metrics identified by a quantitative multi-factor selection process to focus on companies most likely to outperform the broader market.
After the securities are picked out, in the second step, securities are put through an optimizer to create weights that have expectations for minimizing volatility while also meeting other constraints that keep the index from leaning too far in any direction away from the market.