Managing Volatility

Strategies that seek to combine upside potential with downside risk mitigation.

If you're invested, market shifts will impact your portfolio, and trying to accurately time the highs and lows is extremely difficult — if not impossible.

But while volatility can't be eliminated, it can be managed. There are a number of tools and strategies that are designed to help investors participate in the upside while mitigating the risks of the downside.

2 compelling paths to explore

  1. Balanced-risk: spreading risk evenly between various asset classes.

    On the surface, a 60/40 portfolio appears to be fairly balanced. But since stocks are riskier than bonds, it can be overly exposed to stock risk. As the chart below shows, 90% of this portfolio's risk comes from its stock allocation and just 10% from its bond allocation. Balanced-risk strategies decide how much risk exposure to take with each asset class and let that dictate each investment's weighting in the portfolio.

    By splitting risk evenly across stocks, bonds and commodities a portfolio would generally be over-weighted to bonds, since that asset class is the least risky of the three.

    Figure 1: Traditional balanced portfolio Figure 2: Risk contribution Figure 3: Hypothetical balanced-risk portfolio

    1 Sources: Invesco analysis and DataStream. Time period represented: 08/31/73 to 12/31/18. Over this time period, a hypothetical portfolio of 60% stocks and 40% bonds derived 90% of its overall risk from stocks and 10% from bonds based on historical correlations and standard deviations. Bonds are represented by the Bloomberg Barclays U.S. Treasury Index. Stocks are represented by the S&P 500 Index. An investment cannot be made directly in an index. Past performance is not a guarantee of future results.

    2 For illustrative purposes only.

  2. Low volatility stocks: finding stocks with a history of lower volatility than their peers.

    Highly volatile stocks may deliver bursts of soaring performance, but they can be prone to plunges as well. Those plunges can be a real problem. For example, if an investment loses 25%, it has to gain 33% just to get back to where it started. Over the long term, it can be harder for a high volatility stock to make back what it's lost.

    Fortunately, academic research has found that lower-volatility stocks have historically generated better risk-adjusted returns over time than their peers.

    The chart below illustrates the "low volatility anomaly", comparing three common small-cap, mid-cap and large-cap benchmarks with their low volatility counterparts. Since 1995, the low volatility versions of these indexes delivered higher returns with less risk than their peers.

    Low volatility stocks

    Source: Bloomberg, L.P., and Standard & Poor's. The S&P 500 Index is an unmanaged index considered representative of the US stock market. The S&P 500 Low Volatility Index consists of the 100 securities from the S&P 500 Index with the lowest realized volatility over the past 12 months. Data for these two indexes from 4/4/11 (when the low volatility index was incepted) through 3/31/19. The S&P MidCap 400 Index is an unmanaged index considered representative of mid-sized US companies. The S&P MidCap 400 Low Volatility Index consists of 80 out of 400 medium-capitalization securities from the S&P MidCap 400 Index with the lowest realized volatility over the past 12 months. The S&P SmallCap 600 Index is a market-value weighted index that consists of 600 small-cap US stocks chosen for market size, liquidity and industry group representation. The S&P SmallCap 600 Low Volatility Index consists of 120 out of 600 small-capitalization securities from the S&P SmallCap 600 Index with the lowest realized volatility over the past 12 months. Data for these four indexes from 9/24/12 (when the low volatility indexes were incepted) to 3/31/19. Volatility is a statistical measurement of the magnitude of up and down asset price fluctuations over time. Index returns do not represent fund returns. An investor cannot invest directly in an index.

At Invesco, we can help you put these insights into action with a range of relevant solutions.

Balanced-risk strategies

Invesco Balanced-Risk Allocation Fund (ABRZX) An actively managed mutual fund that seeks total return with a low to moderate correlation to traditional financial market indexes. The fund splits its risk evenly among stocks, bonds and commodities, and then it can take advantage of market opportunities by tactically over or underweighting an asset within a 2% risk budget.
Invesco Balanced-Risk Retirement Now Fund (IANAX) A target maturity strategy that seeks to provide real return and, as a secondary objective, capital preservation.
Invesco Balanced-Risk Retirement 2020 Fund (AFTAX)
Invesco Balanced-Risk Retirement 2030 Fund (TNAAX)
Invesco Balanced-Risk Retirement 2040 Fund (TNDAX)
Invesco Balanced-Risk Retirement 2050 Fund (TNEAX)
The 2020, 2030, 2040 and 2050 funds are all target maturity strategies that seek to provide total return with a low to moderate correlation to traditional financial market indices and, as a secondary objective, capital preservation.
Invesco Macro Allocation Strategy Fund (GMSDX) An actively managed mutual fund that seeks a positive absolute return over a complete economic and market cycle. The fund provides exposure to stocks, bonds and commodities using a risk-balanced approach.
Invesco Balanced-Risk Commodity Strategy Fund (BRCAX) An actively managed mutual fund that seeks to provide total return. The fund seeks to achieve its investment objective by investing in derivatives and other commodity-linked instruments that provide exposure to the following four sectors of the commodities markets: agriculture, energy, industrial metals and precious metals.

Low volatility stocks

Invesco S&P 500 Low Volatility ETF (SPLV) The Invesco S&P 500 Low Volatility ETF seeks to track the S&P 500 Low Volatility Index, which consists of the 100 securities from the S&P 500 Index with the lowest realized volatility over the past 12 months.
Invesco S&P MidCap Low Volatility ETF (XMLV) The Invesco S&P MidCap Low Volatility ETF seeks to track the S&P MidCap 400 Low Volatility Index, which consists of 80 out of 400 medium-capitalization securities from the S&P MidCap 400 Index with the lowest realized volatility over the past 12 months.
Invesco S&P SmallCap Low Volatility ETF (XSLV) The Invesco S&P SmallCap Low Volatility ETF seeks to track the S&P SmallCap 600 Low Volatility Index, which consists of 120 out of 600 small-capitalization securities from the S&P SmallCap 600 Index with the lowest realized volatility over the past 12 months.
Important information about the balanced-risk strategies

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Should the Fund's asset classes or the selected countries and investments become correlated in a way not anticipated by the Adviser, the risk allocation process may result in magnified risks and loss instead of balancing (reducing) the risk of loss.

An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer's credit rating.

Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.

The risks of investing in securities of foreign issuers, including emerging markets, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.

By investing in the subsidiary, the fund is indirectly exposed to risks associated with the subsidiary's investments, including derivatives and commodities. Because the Subsidiary is not registered under the Investment Company Act of 1940, as amended (1940 Act), the Fund, as the sole investor in the Subsidiary, will not have the protections offered to investors in U.S. registered investment companies.

Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited.

Underlying investments may appreciate or decrease significantly in value over short periods of time and cause share values to experience significant volatility over short periods of time.

The target maturity funds are subject to the risks of the underlying funds. Market fluctuations may change the target weightings in the underlying funds and certain factors may cause the fund to withdraw its investments therein at a disadvantageous time.

Underlying investments may appreciate or decrease significantly in value over short periods of time and cause an underlying fund's shares to experience significant volatility over short periods of time.

Although an underlying money market fund seeks to preserve the value of the Invesco Balanced-Risk Retirement Now Fund's investment at $1.00 per share, the Fund may lose money by investing in an underlying money market fund.

Certain funds are non-diversified and may experience greater volatility than a more diversified investment.

Commodity-linked notes may involve substantial risks, including risk of loss of a significant portion of principal and risks resulting from lack of a secondary trading market, temporary price distortions, and counterparty risk.

Changes in the value of two investments or asset classes may not track or offset each other in the manner anticipated by the portfolio managers, which may inhibit their risk allocation process from achieving its investment objective.

An investment in exchange-traded funds (ETFs) may trade at a discount to net asset value, fail to develop an active trading market, halt trading on the listing exchange, fail to track the referenced index, or hold troubled securities. ETFs may involve duplication of management fees and certain other expenses. Certain of the ETFs the fund invests in are leveraged, which can magnify any losses on those investments.

Exchange-traded notes (ETNs) are subject to credit risk of the issuer, and the value of the ETN may drop due to a downgrade in the issuer's credit rating, despite the underlying market benchmark or strategy remaining unchanged.

The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the Fund.

Important Information about the ETFs

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund's return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.

Investments focused in a particular industry or sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

There is no assurance that the Fund will provide low volatility.

S&P® is a registered trademark of Standard & Poor's Financial Services LLC (S&P) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones). These trademarks have been licensed for use by S&P Dow Jones Indices LLC. S&P® and Standard & Poor's® are trademarks of S&P and Dow Jones® is a trademark of Dow Jones. These trademarks have been sublicensed for certain purposes by Invesco Capital Management LLC. The Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Invesco. The Fund is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates and neither S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates make any representation regarding the advisability of investing in such product(s).

Stocks of medium-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

Stocks of small-capitalization companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale than large companies.