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The primary investment factors are usually defined as value, size, momentum, low volatility, dividend yield and quality. Of that group, low volatility is arguably the least glamorous, though some market participants with high standards for glamor may argue dividend yield or value are comparably boring.
That’s a debate for another day because low volatility is a strategy whose merits have been on display this year. Admittedly it’s a short timeframe, but the last 10 to 15 or so trading days have been among the most turbulent in recent memory thanks to the White House’s on again/off again posture on tariffs. All that commotion has highlighted low vol perks.
Just look at the S&P 500 Low Volatility Index – a collection of the 100 S&P 500 members with the lowest trailing 12-month volatility. For the 20 days ending April 9, that index outperformed the S&P 500 by 40 basis points. Year-to-date, the volatility-reducing gauge is up 2% compared to a 6.1% slide for the parent gauge. The annualized volatility gap is nearly 1,100 basis points in favor of the low vol index.
Plenty of investors and even some advisors might just leave it there and be satisfied that low volatility is performing as expected this year, but it pays to understand why that’s the case.
The Why Low Vol’s Sturdiness
Advisors and investors familiar with minimum volatility strategies know that sector allocations often figure prominently in this discussion.
“Beyond its defensive stance, this index offers a diversified approach to risk mitigation by reducing exposure to mega-cap stocks and increasing weight to defensive sectors such as Utilities and Consumer Staples,” notes S&P Dow Jones Indices. “This positioning has contributed to its recent outperformance, which can be attributed to a combination of allocation and selection effects.”
The S&P 500® Low Volatility Index is sector-agnostic, but some sectors, such as staples and utilities, are consistently less volatile than other. As a result, those groups frequently loom large in the index. The Invesco S&P 500® Low Volatility ETF (NYSE: SPLV), which tracks that index, accurately represents that theme as utilities and staples stocks combine for about 32% of the ETF’s roster.
In part, that explains why a fund like SPLV will lag during strong-trending bull markets, particularly those where growth stocks lead. Still, low vol’s advantages shouldn’t be diminished because SPLV has a history of doing its job. It’s not only outperforming this year, it did so in 2022 when inflation and interest rates spiked and during the months immediately following the onset of the coronavirus pandemic. Those are just a few recent examples, but SPLV turns 14 years old next month and it has a history of its performing its most basic function when called upon to do so.
Maybe Some Tariff Resilience, Too
Another advantage of select low volatility strategies is that certain sectors are less export-dependent than others. That pertains to the SPLV roster.
“Another factor potentially contributing to the recent outperformance of the S&P 500 Low Volatility Index is the higher proportion of revenue generated by its constituents within the U.S,” adds S&P Dow Jones Indices. “On average, the constituents of the S&P 500 Low Volatility Index derived 72.60% of their revenue from the U.S., in contrast to 59.67% for the S&P 500.”
Bottom line: SPLV and its underlying index are delivering the goods this year and are doing so for reasons rooted in credibility and fundamentals.
Related: Fidelity Converts Pair of Muni Mutual Funds to ETFs