As investors look for ways to diversify a portfolio, consider a volatility-weighted exchange traded fund that strives to help diversify a portfolio away from potential risk posed by a traditional cap-weighted exposure, which is especially relevant after an extended bull market run.

ETF Trends publisher Tom Lydon spoke with Mannik Dhillon, Head of Investment Solutions and Product Strategy at VictoryShares, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk about volatility-weighted ETF strategies.

“We have a unique approach at alternatively weighting traditional cap-weighted indices,” Dhillon said. “Smart beta, if you think about it, has to improve upon some outcome that cap-weighted has provided for years for years and at lower costs.”

Victory Capital offers a line of 11 volatility-weighted ETFs under its VictoryShares suite that are designed to track its proprietary CEMP indexes, including equity options like the VictoryShares US 500 Volatility Wtd ETF (NasdaqGM: CFA), VictoryShares US Small Cap Volatility Wtd ETF (NasdaqGM: CSA), VictoryShares International Volatility Wtd ETF (NasdaqGM: CIL) and VictoryShares Emerging Market Volatility Wtd ETF (NasdaqGM: CEZ).

“Volatility weighting: what it strives to do is use one of those well known factors, not as a selection mechanism, but to really weight the portfolio so you end up with a more diversified exposure,” Dhillon said. “We know that cap weighting is a way to measure the market. It may not be the best investment solution because of the concentration that it can drive in either certain stocks or sectors, and that’s where volatility weighting can really help smooth out the exposure of an index and provide a more balanced outcome.”

The VictoryShares volatility weighted approach should not be confused with low-vol strategies, which are designed to capture excess returns to stocks with lower-than-average volatility, beta, and/or idiosyncratic risk.

“The measure we use is the last 180 trading days of standard deviation, so price volatility,” Dhillon said. “We begin with selecting only profitable companies. Once those profitable companies are selected, you pick the 500 largest in any given asset class, so you’re still true to the cap profile you’re trying to drive, and then you just weight them based on their volatility.”

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