A New ETF Might Be The Optimal Way To Low Volatility

It is not a stretch to say advisors and investors are fond of low volatility exchange-traded funds. However, the popularity of the low volatility strategy under the ETF umbrella also serves as a reminder to investors that in financial markets, there is no such thing as a free lunch.

The biggest drawback of the legacy low volatility ETFs is that, while they should be less bad than traditional equity funds when markets slide, they often do not capture all of the available upside during glaring bull markets. A new ETF is aiming to solve that conundrum. That new fund is the Guggenheim U.S. Large Cap Optimized Volatility ETF (Claymore Exchange-Traded Fund Trust 2 OVLC).

Give A Standing Ovation To OVLC

The new ETF follows the Guggenheim U.S. Large Cap Optimized Volatility Index, a benchmark “designed to capture the benefits of low-volatility investing while attempting to outperform these strategies during market rallies,” according to a statement issued by Guggenheim, the eighth-largest U.S. ETF issuer.

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OVLC's holdings are culled from the S&P 500. From there, the new ETF's “underlying index uses a proprietary formula to calculate the risk-to-reward returns for the trailing 12-month period and project each stock’s volatility and correlation to other stocks in the portfolio,” noted Guggenheim.

The Index, Holdings And Allocations

OVLC's underlying index is home to 93 stocks with an average market capitalization of nearly $96.3 billion. At nearly 20 percent, consumer staples is the benchmark's largest sector weight, which takes a page from legacy low volatility ETFs. However, there are notable sector-level differences between OVLC and older low volatility ETFs.

For example, OVLC's index has a 12.2 percent weight to the technology sector, the largest sector weight in the S&P 500. That is significantly overweight tech relative to rival low volatility ETFs. The index's top 10 holdings include Apple Inc. AAPL and Google parent Alphabet Inc GOOG GOOGL, holdings that are hard to find in established in low volatility funds.

OVLC's nearly 12 percent weight to consumer discretionary stocks is also overweight compared to other low volatility ETFs. Given that consumer discretionary names are historically more volatile than the S&P 500, it makes sense that a low volatility ETF would underweight those names, but that might also be a contributing factor to those ETFs lagging during obvious bull markets.

That does not mean OVLC skimps on some of the staple sectors of low volatility ETFs. For example, the new ETF's index devotes almost 13 percent of its weight to utilities names and its 5 percent weight to telecom stocks is well above the S&P 500's allocation to that sector.

OVLC charges 0.3 percent a year, or $30 per $10,000 invested.