“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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