Do you know what's in your low volatility strategy?
Not all low volatility strategies give you pure exposure to the low volatility factor.
We refer to the methodology of the S&P 500® Low Volatility Index as a "pure" approach to the low volatility factor because it gives investors exposure to stocks with the lowest volatility in their universe, without imposing sector constraints. It's a simple, transparent approach that rotates, through quarterly rebalancing, out of the most volatile stocks to help provide risk mitigation.
|S&P 500® Low Volatility Index approach1||Optimized minimum volatility approach2|
|Offers access to the low volatility factor without imposing sector constraints.||✓|
|Gives exposure to a simple, transparent methodology that allocates, through quarterly scheduled rebalancing, out of the most volatile stocks.||✓|
|Historically offered greater downside protection across large drawdown periods.*||✓|
|Uses complex model to impose sector constraints in an attempt to provide sector & industry diversification.||✓|
For illustrative purposes only.
* The fund is considered non-diversified and may be subject to greater risks than a diversified fund. The Fund's unconstrained approach can result in industry or sector concentration, which may subject it to greater risk and impact by market volatility than investments with sector constraints, such as optimized minimum volatility strategies.
Why a pure approach matters
In down markets, a pure low volatility strategy like the S&P 500® Low Volatility Index has historically outperformed the market and provided greater relative downside protection than the MSCI USA Minimum Volatility Index, which utilizes an optimized minimum volatility approach. We believe this relative outperformance is attributable to our pure, unconstrained approach, which does not impose sector constraints.
S&P 500 Low Volatility Index across drawdown periods vs. MSCI USA Minimum Volatility Index
|Large drawdown periods||S&P 500
Low Vol Index
Min Vol Index
min. vol. %)
vs. MSCI USA
Min Vol (%)
|7/7/2011 – 10/3/2011||-18.4||-7.9||-10.0||+2.1|
|4/2/2012 – 6/1/2012||-9.6||-2.4||-3.5||+1.1|
|9/18/2014 – 10/15/2014||-7.3||-2.3||-3.5||+1.1|
|5/21/2015 – 2/11/2016||-12.8||-1.1||-3.3||+2.2|
Source: Bloomberg L.P., as of Dec. 31, 2017. Past performance does not guarantee future results. An investment cannot be made directly into an index. Index returns do not represent fund returns. Drawdown periods are periods during which the S&P 500 Index had its largest declines from peak to trough, May 5, 2011 to Dec. 31, 2017.
The historical evidence
Additionally, the S&P 500® Low Volatility Index's pure low volatility methodology may also allow for dynamic stock allocation in an attempt to avoid sector bubbles and provide excess return potential across market cycles.
S&P 500 Low Volatility Index annualized excess return versus MSCI USA Minimum Volatility Index
Diversification does not guarantee a profit or eliminate the risk of loss. Source: Bloomberg L.P., as of May 31, 2011 to Dec. 31, 2017. Past performance does not guarantee future results. An investment cannot be made directly into an index. Index returns do not represent fund returns. During the period May 31, 2011 through Dec. 31, 2017, the annualized return for the S&P 500® Low Volatility Index was 13.19%, and the annualized return for the MSCI USA Minimum Volatility Index was 12.80%.
Continuing economic uncertainty makes low volatility strategies an attractive consideration for investors looking for downside risk mitigation and an overall smoother ride. Why tie your hands with sector constraints when methodology like that of the S&P 500® Low Volatility Index provides a pure approach to harvesting the low volatility factor?
For pure access to the low volatility factor, consider PowerShares by Invesco's low volatility suite of exchange-traded funds (ETFs). PowerShares is an ETF industry innovator and smart beta pioneer. We were the first ETF sponsor to launch a product that seeks to track a low volatility index — the S&P 500 Low Volatility Portfolio (SPLV).
Contact us to learn more at 1-800-983-0903.
1 The S&P 500 Low Volatility Index measures performance of the 100 stocks with the lowest realized volatility over the past 12 months from the S&P 500. Constituents are weighted relative to the inverse of the corresponding volatility, with the least volatile stocks receiving the highest weights.
2 An optimized minimum volatility approach applies a mathematical process to screen for low volatility stocks, applying specific constraints to track an underlying index. These constraints may result in the inclusion of stocks that may not be the lowest volatility issues within their universe.
Index returns do not represent Fund returns. An investor cannot invest directly in an index. Neither the underlying Index nor the benchmark indexes charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown; nor do any of the indexes lend securities, and no revenues from securities lending were added to the performance shown. In addition, the results actual investors might have achieved would have differed from those shown because of differences in the timing, amounts of their investments, and fees and expenses associated.
Low volatility describes using volatility rankings while seeking to minimize the effects of market fluctuations.
Smart Beta — Beta is a measure of risk representing how a security is expected to respond to general market movements. Smart Beta represents an alternative and selection index based methodology that seeks to outperform a benchmark or reduce portfolio risk, or both in active or passive vehicles. Smart beta funds may underperform cap-weighted benchmarks and increase portfolio risk.
Volatility measures the standard deviation from a mean of historical prices of a security or portfolio over time.
The MSCI USA Minimum Volatility Index aims to reflect the performance characteristics of a minimum variance strategy applied to the US large- and mid-cap equity universe. The index is calculated by optimizing the MSCI USA Index, its parent index, for the lowest absolute risk (within a given set of constraints). Historically, the index has shown lower beta and volatility characteristics relative to the MSCI USA Index.
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 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.
There is no assurance that the strategies or funds listed in this material will achieve their investment objectives.
Investments focused in a particular industry or sector, such as the industrials sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.
The Fund is considered non-diversified and may be subject to greater risks than a diversified fund.
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 PowerShares Capital Management LLC (PowerShares). The Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by PowerShares. 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).