With a seasonally weak period for equities here and increased chatter about rising equity market volatility, some investors may want to consider low volatility strategies. Exchange traded funds can make that endeavor even easier.
The PowerShares S&P 500 Low Volatility Portfolio SPLV is one of the largest domestic low volatility ETFs and CFRA Research's focus ETF for the month of May.
Embracing a low volatility fund in May could be a solid idea, as historical data points suggest defensive sectors often perform well in the fifth month of the year.
What Happened
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. The idea behind SPLV and other low volatility picks is not necessarily to capture all of a bull market's upside, but to minimize downside in bear markets. With midterm elections looming in November, SPLV could be worth a look now.
“The S&P 500 has usually experienced challenging times in the six months leading up to the early November midterm elections, possibly due to the uncertainty associated with the change in the presidential party’s representation in Congress,” CFRA ETF & Mutual Fund Research Director Todd Rosenbluth said in a Monday note. “Since 1946, the S&P 500 fell in price in 50 percent of all observations, declining an average 1.1 percent and slipping by double digits in five of nine times.”
Why It's Important
SPLV is sector-agnostic, meaning it is not married to the sectors investors usually associate with low volatility. Fortunately, that means a relatively low weight of just under 7.7 percent to the downtrodden consumer staples sector.
Conversely, rate-sensitive utilities are SPLV's largest sector weight at about 23.7 percent, but some of that rate sensitivity is diminished by a 20-percent allocation to financial services stocks.
“Since 1998, the S&P 500 Low Volatility index climbed 3 percent on average in the May-October period, stronger than the 1.2-percent total return for the broader S&P 500 index,” Rosenbluth said. “During times of traditional large-cap market volatility, the more defensively oriented low volatility index has performed better. Such data supports a look at SPLV, and what’s inside it makes it particularly appealing, in CFRA’s view.”
What's Next
SPLV does make good on its low volatility promise, as its three-year standard deviation is lower than that of the S&P 500. CFRA has Buy ratings on several of the fund's well-known holdings across multiple sectors. The research firm rates SPLV Overweight.
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