This article was originally published on ETFTrends.com.
The low volatility factor, represented by ETFs such as the Invesco S&P 500 Low Volatility Portfolio (SPLV) , has been a stout performer this year, causing valuations on sectors often deemed as “defensive” to rise, but that may not be problematic for low vol funds.
The low-volatility ETFs are factor-based strategies that tilt toward companies with a propensity for lower volatility. Different issuers and index providers arrive at a basket of low volatility stocks in varying fashions. Historical data confirm that over long holding periods, the low volatility factor is rewarding for investors.
SPLV tracks the S&P 500 Low Volatility Index, which is comprised of the 100 S&P 500 members with the lowest trailing 12-month volatility. While the fund is designed to be sector agnostic, it often features large allocations to utilities, financial services, and real estate stocks. Those sectors currently combine for about two-thirds of SPLV's weight, according to Invesco data.
“By definition, these are humdrum stocks: Their volatility is below average compared to the broader market, individual sectors, or other stocks within a sector,” reports Daren Fonda for Barron's. “Utilities, real-estate investment trusts (REITs), and insurance companies make up about 50% of the S&P 500 Low-Volatility Index, but there are other methodologies that result in different sector and industry weightings.”
Low Volatility Strategies Are Pricey, But...
Defensive sectors often carry higher valuations than the broader market and those multiples have been ticking higher as trade tensions motivate investors to seek refuge from higher beta groups. However, low volatility strategies are usually more expensive than broader benchmarks.
“Low-volatility stocks are trading at almost three standard deviations above the mean, according to Leuthold’s director of research and equities, Scott Opsal,” reports Barron's. “That means low-vol is more expensive than it has been nearly 99% of the time, relative to the mean, since 1990.”
Even with those supposedly frothy multiples, more than 39% of SPLV's holdings are classified as value stocks while less than 14% are classified as growth stocks.
Low-volatility factor investments work on the idea that they help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.
Over the past year, investors have added $3.32 billion to SPLV, good for the largest inflows tally among all Invesco ETFs
For more information on unique investing strategies, visit our Equity ETF Channel.
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