Amid Turmoil, a Low Vol Smart Beta ETF Shines
This article was originally published on ETFTrends.com.
Low volatility exchange traded funds, such as the PowerShares S&P 500 Low Volatility Portfolio (SPLV) , are not designed to be exciting. However, boring can be beautiful for low volatility stocks and ETFs when growth and momentum names fall out of favor, as has been the case dating back to October.
Since U.S. equity market volatility spiked early last month, some beloved growth names are falling out of favor with some members of the FAANG quintet giving up their 2018 gains. While SPLV is not setting the world on fire over that period, the low volatility is outperforming broader equity benchmarks since the start of the fourth quarter.
“For most of 2018, the S&P 500 Low Volatility Index underperformed its parent S&P 500,” said S&P Dow Jones Indices in a recent note. “Through the first nine months of 2018, the S&P 500 climbed 11% while the S&P 500 Low Volatility Index was up only 6%. Then October came and, in one month of acute volatility, the low volatility index recaptured parity with the benchmark. Both indices were up around 3% year to date through Oct. 31, 2018. (This reversal trend continued into November and the S&P 500 Low Volatility Index now has the lead.)”
Related: DWS Offers ESG-Related ETFs for Sustainable Investing
Sector Bets
SPLV tracks the aforementioned S&P 500 Low Volatility Index. That index is not constrained at the sector level. Rather, it holds the 100 S&P 500 stocks with the lowest trailing 12-month volatility. At a time when volatility is rising across sectors, SPLV's sector weights take on added importance.
“Volatility rose across all sectors of the S&P 500 and this gives us partial insight into the latest rebalance (reflecting data as of Oct. 31, 2018 and effective after market close Nov. 16, 2018) for the S&P 500 Low Volatility Index,” said S&P Dow Jones.
SPLV features light allocations to some of the most volatile sectors, such as consumer discretionary and energy, while featuring large weights to docile groups like utilities and real estate.
The Fidelity Low Volatility (FDLO) , JPMorgan US Minimum Volatility (JMIN) and Oppenheimer Russell 1000 Low Volatility Factor (OVOL) are other low volatility ETFs to consider.
For more on Smart Beta ETFs, visit our Smart Beta Channel.
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