Low Volatility ETFs Are Strutting Their Stuff Again

Through the first three quarters of 2018, the growth and momentum factors continued surging, prompting investors to rebuke conservative strategies such as low volatility. That theme came to a screeching halt in October.

“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%,” S&P Dow Jones Indices said in a recent note. “Then October came and, in one month of acute volatility, the low volatility index recaptured parity with the benchmark.”

What Happened

The S&P 500 Low Volatility Index is the underlying benchmark for the Invesco S&P 500 Low Volatility ETF SPLV, one of the largest exchange traded funds emphasizing the low volatility investment factor.

The aim of low volatility strategies like SPLV is not to capture all of the upside in a strong trending bull market, but rather to perform less poorly when stocks decline. That has been the case with SPLV dating back to the start of October. Monday's price action confirmed as much as SPLV lost just 0.4 percent while the S&P 500 lost 1.66 percent. SPLV is up 3.79 percent year-to-date, well ahead of the S&P 500.

Why It's Important

As has been previously reported, SPLV isn't constrained at the sector level, but its large sector weights often remain consistent. That can be a good thing at a time when volatility is rising across sectors.

Not surprisingly, the most volatile sectors at the end of October relative to the end of July were communication services, technology and energy. SPLV devotes just 10 percent of its weight to tech stocks, has no exposure to communication services names and energy is the fund's smallest sector weight at just 1.63 percent.

The least volatile sectors – utilities and real estate – combine for over 42 percent of SPLV's weight. On a related note, just seven ETFs hit record highs Monday, one of which was a utilities ETF. The S&P 500 Utilities Index is up 1 percent this month.

What's Next

Some technology names were recently dropped from SPLV, but the ETF's exposure to that sector remains high relative to the fund's historical exposure to that group.

“A few names dropped from the Technology sector but the sector’s current standing within the index is still fairly significant from a historical context. Real Estate continued to gain ground, now almost on par with Utilities’ weight in the index,” according to S&P Dow Jones.

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