Looking ahead, the U.S. economy is still slowly expanding and the Federal Reserve is embarking on a tighter monetary policy outlook. Small-caps, though, can still navigate through a slowly rising rate environment. Smaller companies, which focus on U.S. markets, are less exposed to a stronger U.S. dollar as rates rise, which would more negatively affect larger corporations with a global footprint. Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies.

“Each quarter, it ranks the stocks in the S&P SmallCap 600 Index by their volatility during the past 12 months and targets the least-volatile 120. It then weights these holdings by the inverse of their volatility, so that the least volatile stocks get the largest weightings in the portfolio. The fund has been successful at reducing volatility and downside risk, but it does take big sector bets from time to time, which may not always pay off,” according to Morningstar.

Morningstar has a Bronze rating on XSLV.

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