Rising U.S. interest rates are often seen as a strike against low volatility equities and ETFs, but at least one ETF focusing on low volatility fare is built to survive and thrive in rising rate environments.
The PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (NYSEArca: XRLV) gives investors the ability to combine the low volatility and hedging rising rates themes. The underling index is composed of the 100 constituents of S&P 500 Index that exhibit both low volatility and low interest-rate risk. XRLV’s underlying index is the S&P 500 Low Volatility Rate Response Index.
That benchmark “is designed to include stocks exhibiting low volatility characteristics, after removing stocks that historically have performed poorly in rising interest rate environments,” according to Invesco.
The low-vol strategy targets stocks that have lower expected risk or less idiosyncratic risks. Specifically, the strategy focuses on equities that exhibit lower beta, a measure of volatility or systematic risk of a security to that of the overall market. Consequently, minimum volatility portfolios are comprised of stocks that exhibit lower market risk or beta.
Better Over The Long Haul
Data suggest that XRLV’s index wins over the long-term as interest rates rise.