Finding ways to mitigate one's portfolio risk while maintaining a prescribed level of expected return is an exercise which is constantly being carried out. There are many different schemes which have been employed in the past to attempt to accomplish this task, and few pass the time tested criteria required to show excess alpha over time.
Investing in low volatility funds is one of the premier strategies for investors seeking to stay invested in equities, albeit with limited risk. Exchange traded funds (ETFs) like the Invesco S&P 500 Low Volatility ETF (SPLV) essentially pick stocks with the lowest volatility over the past 12 months, choosing the 100 lowest volatility companies on the S&P 500 at a given time. The fund then weights these securities on the trailing 12-month volatility exemplified by these companies, with the lowest volatility firms receiving the greatest weighting.
This ETF has performed well, on a risk-adjusted basis, providing investors with the desired effect. SPLV's standard deviation has remained more than 3% below the S&P 500, with a beta of just 0.59, remarkable numbers for those who care about risk adjusted returns.
That being said, turnover for this fund is high, relative to its peers, and investors pay for this turnover with a relatively high expense ratio of 0.25%. The fund has yielded approximately 2.1%, offsetting some of these fees, and providing liquidity for income investors who seek to remain in equities while managing their risk profile accordingly.
Invest wisely, my friends.
