Many investors may be exposed to unintended risks as they rely on traditional market capitalization-weighted index funds. However, investors may consider diversifying with smart beta ETFs that take an alternative view on the markets.
“There is a better way to be diversified when you are investing in the market because we don’t know how long the rally will last, we don’t know what the dips are going to look like,” Mannik Dhillon, President of Victory Shares and Solutions at Victory Capital, said at the 2018 Morningstar Investment Conference.
Specifically, Dhillon pointed to the VictoryShares US 500 Volatility Wtd ETF (NasdaqGM: CFA) as an attractive alternative to diversify market exposure.
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.
While low-vol ETFs may only hold companies that tend to exhibit smaller swings using the factor as a selection, the VictoryShares suite starts with the broad market and screens for companies with four quarters of positive earnings Those stocks are then weighted based on their standard deviation over the past 180 trading days.
Stocks with lower volatility are given higher weightings and stocks with greater volatility are given lower weightings. Ultimately, all securities that pass the earnings criteria are present, just at different weights. The weightings are based on volatility, so you end up with a more balanced and risk-aware approach to investing in the broad market.
For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.