If U.S. Rates Rise, Look to Low Vol Strategies

“Over the longer time horizons, the low volatility and rate response indices outperformed the S&P 500, with lower volatility. In fact, the rate response index performed better than both the low volatility index and the S&P 500 for all measured periods. The rate response index was slightly more volatile than the low volatility index—nevertheless, it had a cumulative risk reduction of 19.3% relative to the S&P 500 (the low volatility index had a risk reduction of 23%),” according to S&P Dow Jones Indices.

Unlike traditional low volatility ETFs, XRLV is not heavily allocated to rate-sensitive sectors. For example, the fund devotes less than 8% of its weight to the consumer staples sector and has no exposure to utilities stocks. XRLV devotes more than 42% of its combined weight to financial services and industrial names.

“In recent years, stocks have been in one of the longest-running bull markets with low volatility, leading to somewhat moderate volatility reduction for the two indices. However, for the time horizons that cover at least one full market cycle (bull and bear markets), the risk reduction of the two indices versus the S&P 500 was more evident,” according to S&P Dow Jones.

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