For an investor, volatility can be a friend or foe–for the short-term investor, it can offer a broad range of trading options for profitability, but for long-term investors, it can be unnerving to hold on to an investment when prices are fluxing wildly.
However, investment companies like VictoryShares are befriending volatility and using it to create innovative solutions, such as their VictoryShares exchange-traded funds in the core broad market: VictoryShares US 500 Volatility Wtd ETF (NASDAQ: CFA), VictoryShares US Small Cap Vol Wtd ETF (NASDAQ: CSA), VictoryShares International Vol Wtd ETF (NASDAQ: CIL), and VictoryShares Emerging Mkt Vol Wtd ETF (NASDAQ: CEZ).
Mannik S. Dhillon, President of VictoryShares, told ETF Trends that its ETFs “use volatility as a weighting mechanism to achieve diversification.” Using volatility rather than concentrating on a specific market sector or utilizing a cap weighting strategy, which is the practice of using market price and the outstanding shares to determine the percentage weighting of a company for inclusion in an index, helps Victory Capital provide investors with solutions that can weather different market environments.
“We strive to create a diversified portfolio using volatility as a weighting tool,” said Dhillon. “And what that does is it essentially says instead of weighting companies by their market cap, weight them based on their historical risk. We think one of the primary benefits of volatility weighting is that can achieve diversification without taking additional risk.”
Thus far, the proverbial proof is in the pudding as evidenced by aforementioned ETFs’ performance:
- VictoryShares US 500 Volatility Wtd ETF (NASDAQ: CFA)–one year total return: 14.59%
- VictoryShares US Small Cap Vol Wtd ETF (NASDAQ: CSA)–one year total return: 19.10%
- VictoryShares International Vol Wtd ETF (NASDAQ: CIL)–one year total return: 10.67%
- VictoryShares Emerging Mkt Vol Wtd ETF (NASDAQ: CEZ)–one year total return: 7.14%
Large Cap Volatility
When looking at CFA in particular, it may be surprising to see that the large companies comprised in the ETF are generating excellent returns via volatility since the common notion is that these stock prices should be relatively static in nature. As such, risk-averse investors may flock to these stocks more, but Dhillon begs to differ if the current market environment no longer renders these investments as the safe haven investors think they are.