Amid talk about strength in cyclical stocks and the growth and momentum factors performing well this year, some investors may be taking their eyes off low volatility exchange traded funds. However, some “low vol” ETFs are making new highs.
That includes the Fidelity Low Volatility Factor ETF (FDLO), which hit a new high last Friday. The low volatility factor has proven to help investors capture growing markets while limiting drawdowns during periods of increased volatility to generate improved risk-adjusted returns over the long haul.
Market segments will perform differently during various economic cycles, and as the U.S. may be heading toward the late business cycle, exchange traded fund investors should consider which areas could drive returns or increase portfolio risks. While low-volatility exchange traded funds may not outperform in a strong bull rally over the short-term, the strategy’s ability to hedge downside risk may be worth it over the long run.
FDLO, which debuted in September, holds large- and mid-cap U.S. companies that exhibit lower volatility than the broader market. Holdings include those that show historically low volatility of returns, low beta (a measure of market sensitivity) and low earnings volatility.
FDLO tracks the Fidelity U.S. Low Volatility Factor Index, “which is designed to reflect the performance of stocks of large and mid-capitalization U.S. companies with lower volatility than the broader market. It may lend to earn income for the fund,” according to Fidelity.
At the sector level, FDLO is not your grandfathers low volatility ETF. Four sectors – consumer staples, healthcare, telecom and utilities – are considered defensive. However, FDLO’s overall exposure to those sectors relative to older low volatility ETFs is light. For example, utilities and telecom stocks combine for just 5.3% of FDLO’s weight. In some rival low volatility ETFs, utilities alone are 20% or more of the fund’s weight.
Where FDLO really breaks from its low volatility ETF brethren is with its technology exposure. FDLO’s largest sector weight is technology at almost 22%, an unheard of trait among many established low volatility funds.
FDLO allocates 28% of its combined weight to financial services and healthcare stocks. The ETF charges 0.29% per year, which is low among smart beta strategies. Fidelity clients can trade FDLO free of charge on the firm’s expansive commission-free ETF platform.
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