Low-Vol ETFs Performed Well—Until They Didn’t. Here’s What Happened, and Why. By Evie Liu May 1, 2020 8:30 am ET Order Reprints Print Article Text size Photograph by Keenan Constance During recent selloffs, including the sharp drops that sent the market into bear territory, “low-volatility” stocks beat the overall market. But no more. Once the initial shock subsided, investors opted for so-called quality stocks, as the Covid-19 pandemic reminds everyone that there’s more to risk than just the size of a stock’s price swings. Ever since the financial crisis, investors have flocked to the stocks with the smallest price swings, dubbed low-volatility stocks. The lack of volatility was supposed to steer investors away from danger, and for the most part, it did. When the S&P 500 index plunged nearly 20% during the fourth quarter of 2018, for instance, the $9.6 billion Invesco S&P 500 Low Volatility exchange-traded fund (ticker: SPLV)—the purest play for low-vol stocks—suffered only half of that loss. Even in the early stages of the current crisis, from the S&P 500’s peak on Feb. 19 until March 9,Invesco' slow-vol ETF fell 13% to the S&P’s 19% decline. But extend that time frame out two more weeks, through the market’s low on March 23, and the S&P 500 had fallen 34% and the Invesco ETF by a deeper 36%. Since that bottom, the low-vol ETF has recovered 27% to the S&P’s 30%. Has low volatility failed? In its purest form, perhaps. The Invesco fund holds the 100 stocks that had the smallest price swings in the past 12 months; it rebalances quarterly but otherwise does not put any parameters around its holdings. That often leaves the fund with large sector weightings that make it look nothing like the S&P 500. For instance, the ETF has 28% in utility stocks, a sector that makes up less than 4% of the S&P 500. Historically, that has helped performance in downturns, but recently, it hasn’t. The utility sector fell 36%from the S&P 500’s peak to its trough, two percentage points deeper than the index itself. Investors worried that factory shutdowns could lead to significantly lower power usage, and that struggling households might not be able to pay their utility bills. Balance sheets also became a concern, helping to accelerate the drop, says Nick Kalivas, senior equity products strategist at Invesco. Not helping matters: The real estate sector, another big overweight in the Invesco ETF, fell 38% due to worries about deferred mortgages and rent payments amid coronavirus shutdowns. It wasn’t just sector bets, however. While the $33.4 billioni Shares Edge MSCI Min Vol USA ETF (USMV), which keeps its sector weighting more aligned with the S&P, held up better than the Invesco ETF since Feb. 19, beating it by over three percentage points, it has trailed the S&P by one percentage point. Anyone hoping that low-vol funds would mean smaller losses during this market tumble has been disappointed. Don’t expect things to get much better, says Morgan Stanley Investment Management portfolio manager Andrew Slimmon. If the economy begins to open up and come out of a recession, the market’s cheapest stocks—airlines, cruise lines, and hotels—are likely to bounce back sharply, he says. None of those stocks appear in low-volatility portfolios. And if the economy doesn’t bounce back? High-quality stocks might make a better bet. While definitions of quality differ, they usually screen for companies that have high profit margins and healthy balance sheets. The latter quality, in particular, has been valuable when companies struggle with cash flow and a tightening credit market amid the Covid-19 disruptions. The $1.8 billion Invesco S&P 500 Quality ETF (SPHQ) has nearly no exposure to utilities and real estate. Instead, it’s heavily invested in the technology, health-care, and consumer-staples sectors. Since Feb. 19, the fund has outperformed the S&P 500 by nearly four percentage points and beaten the Invesco Low Volatility ETF by eight points. B Write toEvie Liu atevie.liu@barrons.com https://www.barrons.com/articles/lo...didnt-heres-what-happened-and-why-51588336200
%% Sometimes they do live their name; but I never found any I liked= not enough vol on the upside.LOL But takes all kinds to make a market.Thanks,