Here's What's Driving This Low Volatility ETF Higher

When stocks swooned in the fourth quarter of 2018, investors turned to more defensive strategies, including low volatility exchange traded funds.

Those funds, including the Invesco S&P 500 Low Volatility ETF SPLV, did their job, which is to perform less poorly than traditional equity benchmarks when stocks tumble.

What Happened

While SPLV and rival funds performed admirably in the last three months of 2018, renewed risk appetite in 2019 is not hindering the low volatility factor. Year-to-date, SPLV is higher by 9.41 percent and hit an all-time last Friday.

Yes, SPLV is lagging the S&P 500 by 157 basis points, but it pays to remember that the primary objective of low volatility ETFs is not to capture all of the upside when stocks trend higher, but rather to provide lower downside capture when stocks falter.

Why It's Important

Low volatility strategies are sector agnostic, but some sectors have long-standing reputations for being less volatile than others, so SPLV is often dominated by those groups.

“Since the last rebalance for the S&P 500 Low Volatility Index, volatility continued to increase universally across all sectors of the S&P 500,” said S&P Dow Jones Indices in a recent note. “Among the sectors that increased the most in volatility was Information Technology, up five percentage points, while Utilities’ volatility increased the least.”

SPLV allocates just over 42 percent of its combined weight to the utilities and real estate sectors. Those are defensive groups often prized by investors for above-average dividend yields and below-average volatility.

“It is therefore not surprising that the low volatility index increased its weight in Utilities in the latest allocation shuffle; the sector now composes a quarter of the index,” according to S&P Dow Jones.

What's Next

Sectors believed to be defensive don't always find their way to large weights in SPLV. For example, the fund devotes just 16.83 percent of its combined weight to the health care and consumer staples sectors. Technology stocks represent 7 percent of the ETF's weight.

“Unexpectedly, Information Technology’s weight in the low volatility index remained more or less unchanged. This likely means that volatility levels of stocks within the sector were widely dispersed, with pockets of relative stability,” according to S&P Dow Jones.

Over the past year, investors have added $1.98 billion to SPLV, a total surpassed by just one other Invesco ETF.

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