Title: Defensive factors when market risk is rising
Description: Investors can choose factors along the risk spectrum, such as quality and low volatility, two of the more defensive equity factors, when markets are volatile.
Three key factors are driving rising US market risk. First, monetary policy remains restrictive, with the Federal Reserve prioritizing price stability and managing inflation expectations despite signs of slowing economic growth. Second, geopolitical and economic tensions around trade policies are colliding with elevated large-cap equity valuations, contributing to market volatility. Third, there’s uncertainty around the extension of the 2017 Tax Cuts and Jobs Act (TCJA), which is set to expire at year-end.
While consumers have remained relatively resilient, the risk of higher borrowing costs, lower economic growth, higher tariff-induced prices, and a potential tax hike if the TCJA isn’t extended may prove too much for the economy.
Fortunately, there’s the potential for these risks to be resolved. The Fed may become satisfied enough with price stability to begin lowering interest rates. The US may reach more favorable terms with its major trading partners. And the Republican-led White House and Congress may preserve and extend a majority of the TCJA provisions.
With these seemingly bifurcated outcomes in mind, investors with different risk tolerances may want to target different factors along the risk spectrum. Two of the more defensive equity factors are quality and low volatility. SPHQ invests in the 100 securities in the S&P 500 Index with the highest quality scores, calculated based on return on equity, the accruals ratio, and the financial leverage ratio. SPLV invests in the 100 securities in the S&P 500 Index with the lowest realized volatility over the past 12 months. While both are generally considered defensive, they’ve historically offered different levels of downside mitigation and upside participation. For more risk-averse investors, SPLV’s historical 59% down capture and 69% up capture may be appealing. For investors more optimistic and seeking more upside potential, SPHQ’s historical 93% down capture and 95% up capture may be more attractive.
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Important Information
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All data sourced from Bloomberg as of April 2025 unless otherwise stated.
Volatility refers to the degree of variation in the price of a security over a specific period. It is a statistical measure of the dispersion of returns for a given security or market index.
Past performance is not a guarantee of future results. An investment cannot be made into an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions expressed are those of Invesco, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
SPHQ
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 sector, such as information technology and health care, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.
The Fund may become “non-diversified,” as defined in the Investment Company Act of 1940 (the “1940 Act”), solely as a result of a change in relative market capitalization or index weighting of one or more constituents of the Index. Should the Fund become “non-diversified,” it will no longer be required to meet certain diversification requirements under the 1940 Act and may invest a greater portion of its assets in securities of a small group of issuers or in any one individual issuer than can a diversified fund. Shareholder approval will not be sought when the Fund crosses from diversified to non-diversified status solely due to a change in relative market capitalization or index weighting of one or more constituents of the Index.
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.
SPLV
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 sector, such as consumer staples, 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.
The Fund may become “non-diversified,” as defined under the Investment Company Act of 1940, as amended, solely as a result of a change in relative market capitalization or index weighting of one or more constituents of the Index. Shareholder approval will not be sought when the Fund crosses from diversified to non-diversified status under such circumstances.
Shares are not individually redeemable, and owners of the Shares may acquire those Shares from the Fund and tender those Shares for redemption to the Fund in Creation Unit aggregations only, typically consisting of 10,000, 20,000, 25,000, 50,000, 75,000, 80,000, 100,000, or 150,000 Shares.
Invesco Distributors, Inc. 4/25 NA 4431049
Three key factors are driving rising US market risk. First, monetary policy remains restrictive, with the Federal Reserve prioritizing price stability and managing inflation expectations despite signs of slowing economic growth. Second, geopolitical and economic tensions around trade policies are colliding with elevated large-cap equity valuations, contributing to market volatility. Third, there’s uncertainty around the extension of the 2017 Tax Cuts and Jobs Act (TCJA), which is set to expire at year-end.
While consumers have remained relatively resilient, the risk of higher borrowing costs, lower economic growth, higher tariff-induced prices, and a potential tax hike if the TCJA isn’t extended may prove too much for the economy.
Fortunately, there’s the potential for these risks to be resolved. The Fed may become satisfied enough with price stability to begin lowering interest rates. The US may reach more favorable terms with its major trading partners. And the Republican-led White House and Congress may preserve and extend a majority of the TCJA provisions.
With these seemingly bifurcated outcomes in mind, investors with different risk tolerances may want to target different factors along the risk spectrum. Two of the more defensive equity factors are quality and low volatility. SPHQ invests in the 100 securities in the S&P 500 Index with the highest quality scores, calculated based on return on equity, the accruals ratio, and the financial leverage ratio. SPLV invests in the 100 securities in the S&P 500 Index with the lowest realized volatility over the past 12 months. While both are generally considered defensive, they’ve historically offered different levels of downside mitigation and upside participation. For more risk-averse investors, SPLV’s historical 59% down capture and 69% up capture may be appealing. For investors more optimistic and seeking more upside potential, SPHQ’s historical 93% down capture and 95% up capture may be more attractive.
Hedged equity strategies seek to mitigate market risk while participating in gains by combining long equity positions with hedging instruments such as options.
Investors seeking stock exposure and consistent income that can help offset market losses may want to consider option income ETFs.
In volatile markets, consider a hold-to-maturity bond strategy that locks in a known yield-to-maturity. Another option, global high yield corporate bonds.
NA4474667
All data sourced from Bloomberg as of April 2025 unless otherwise stated.
Past performance is not a guarantee of future results. An investment cannot be made into an 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 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.
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