With stocks sagging and market volatility creeping higher, some investors are turning to a familiar destination in an effort to remain engaged with equities: Low volatility exchange traded funds.
The Franklin Liberty U.S. Low Volatility ETF (FLLV) is one of the members of that group. FLLV is unique among ETFs with the low volatility objective in that it’s actively managed while the bulk of its rivals are index-based strategies.
That could be a point in FLLV’s favor because there’s no predicting what corners of the market will be the most or least volatile when turbulence hits. Said another way, passively managed, low-volatility ETFs may end up being exposed to sectors and stocks that turn out to be surprisingly volatile. As an active fund, FLLV can avoid that problem.
FLLV “provides access to companies with low-volatility profiles relative to industry peers while remaining diversified across sectors,” according to Franklin Templeton. “Uses fundamental analysis for stock selection and is enhanced by a proprietary quantitative model.”
FLLV attempts to beat the Russell 1000 Index and it is accomplishing that objective this year. Year-to-date, the Franklin Templeton ETF is outperforming the widely observed Russell 1000 Index by nearly 650 basis points. Alone, that gap is impressive, but it’s even more so when considering that statistic confirms FLLV is accomplishing what low volatility ETFs are designed to do: Perform less poorly than standard equity strategies when the broader market declines.
On the other hand, low volatility ETFs aren’t designed to capture all of a bull market’s upside, but FLLV could surprise in the event of a broader market rebound. The fund allocates almost 27% of its weight to the technology sector — an anomaly among low volatility ETFs.
The health care sector — a group some market observers believe is offering quality and value after suffering undue punishment — accounts for almost 14% of the FLLV portfolio. All of that is to say consumer staples and utilities, which are often pillars of passive low vol ETFs, aren’t charting the course for FLLV. Those two sectors combine for barely more than 9% of the fund’s roster.
FLLV has another surprise. It allocates almost 5% of its weight to energy stocks. That’s not a massive exposure, but at a time when energy is the best-performing sector in the S&P 500, the benefits of FLLV being actively managed are apparent because many passive funds in this category eschew energy exposure.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.