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Using Low Volatility ETFs to Complement Your Portfolio

Combining a low-volatility ETF with your other holdings could potentially maximize the performance of your overall portfolio.

Now may be the right time for Low Volatility

The more a stock’s price falls, the more it has to gain just to get back to even — this simple math explains the appeal of the Low Volatility factor. It seeks to participate in up markets and cushion the blow of down markets. Today, many people feel that the market is at risk of a downturn after so many years of a historic bull market. If you’re concerned about what’s to come, now may be the time to consider Low Volatility.

How can I implement the Low Volatility factor in a portfolio?

The Low Volatility factor exists in US and international stocks, and across the market-cap spectrum, so it can play a role across asset classes.

And, as the chart below shows, it has a particularly low historical correlation with the Value factor, and negative correlation with the Quality and Momentum factors. Therefore, it may potentially help to diversify portfolios that are concentrated in these areas.

two-year correlation of excess returns
Source: Bloomberg L.P., as of June 30, 2019. Correlations below 0.50 represent increased diversification potential. Diversification does not guarantee a profit or eliminate the risk of loss. Low Volatility is represented by the S&P 500 Low Volatility Index; Dividend Yield by the S&P 500 Low Volatility High Dividend Index; Quality by the S&P 500 Quality Index; Value by the S&P 500 Enhanced Value Index; Momentum by the S&P 500 Momentum Index and Size by the S&P 500 Equal Weigh Index. An investment cannot be made directly into an index.
Are all Low Volatility factor strategies the same?

No, not all Low Volatility factor approaches are alike. For example – some have sector constraints, meaning that they must maintain at least some exposure to each sector at all times. So, if one sector is particularly volatile, that may result in a higher volatility stock being included in the portfolio over a lower volatility stock in a different sector.

Other strategies use a “pure” approach, meaning that the lowest volatility stocks are included in the portfolio, with no constraints. Such portfolios are generally rebalanced on a regular schedule (such as quarterly), to ensure that holdings can be adjusted as volatility changes.

Those who want full exposure to what the Low Volatility factor has to offer may want to consider a pure approach. Such an approach may help investors avoid major sector downturns and bubbles. During the technology bubble of 2000 and the financial crisis of 2008, a sector-constrained portfolio could have resulted in extended exposure to out-of-favor sectors.

Learn more about the “pure” approach of Invesco’s Low Volatility suite of products.

Explore SPLV.

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