Deep Dive: These three ETFs have beaten S&P indexes while cutting risk

Memories are short. Did the stock market rebound this week soothe your fourth-quarter fears?

That’s why it’s an optimal time to consider ways to lower your portfolio risk. Doing so may even lead to higher returns over the long haul.

Invesco, the Atlanta-based investment-management firm known for its exchange traded funds (ETFs), runs three ETFs that hold subsets of the broad SP indexes, with the objective of lowering investment risk. And it turns out the ETFs have actually outperformed the indexes over longer periods. They also held up better during the fourth quarter, when the benchmark SP 500 Index dropped 14%.

SP Dow Jones Indices maintains the large-cap benchmark SP 500 Index

SPX, +0.45%

as well the SP 400 Mid-Cap Index

MID, +0.80%

and the SP Small-Cap 600 Index

SML, +0.31%

Those are weighted by market capitalization, which means for the SP 500 the largest five companies —

AMZN, -0.19%


MSFT, -0.64%


AAPL, +0.32%


GOOG, -0.40%

GOOGL, -0.26%

 and Facebook

FB, -0.02%

— make up 16% of the index. In other words, a lot of risk is concentrated among a small group of stocks. When Apple’s shares tumbled 30% in the fourth quarter, SP 500 investors felt the pain.

SP Dow Jones Indices also developed low-volatility versions of the broad indexes. The SP 500 Low Volatility Index includes the 100 SP 500 stocks that have had the lowest price volatility over the previous 12 months. It is rebalanced quarterly. There are similar low-volatility indexes for the SP 400 Mid-Cap Index and the SP Small-Cap 600 Index.

Invesco manages ETFs that track all three low-volatility indexes. They’re rebalanced quarterly. Here’s how they’ve performed, for various periods:

ETF or Index Ticker Total return – Q4 2018 Total return – 2018 Total return – 3 years through Jan. 9 Total return – 5 years through Jan. 9 Total return – 7 years through Jan. 9 Invesco SP 500 Low Volatility ETF

SPLV, +1.00%

-5% 0% 35% 59% 116% SP 500 Index

SPX, +0.45%

-14% -6% 34% 41% 102%           Invesco SP Mid-Cap Low Volatility ETF

XMLV, +0.97%

-8% 0% 47% 75% N/A SP Mid-Cap 400 Index

MID, +0.80%

-18% -12% 34% 30% 95% Invesco SP Small-Cap Low Volatility ETF

XSLV, +0.23%

-13% -5% 47% 62% N/A SP Small-Cap 600 Index

SML, +0.31%

-20% -10% 44% 36% 113% Source: FactSet

The three ETFs have annual expenses of 0.25% of assets.

You can see that the Invesco SP 500 Low Volatility ETF

SPLV, +1.00%

 has beaten the performance of the SP 500 for all periods listed. The ETF was established in May 2011.

The Invesco SP Mid-Cap Low Volatility ETF

XMLV, +0.97%

 and the Invesco SP Small-Cap Low Volatility ETF

XSLV, +0.23%

 were established in February 2013.

Here’s a look further back, this time comparing the SP 500 Low Volatility Index to the entire SP 500 Index for 10 years, through Jan. 9:


Yes, the full SP 500 beat the SP 500 Low Volatility Index for 10 years. But things aren’t always so simple. It turns out the broad index fell a lot further than the SP 500 Low Volatility Index during 2008. Let’s look at an 11-year chart:


Now the SP 500 Low Volatility Index is back in the lead because it fell “only” 21% during 2008, when the entire index took a 37% beating.

The SP 500 Low Volatility Index “tends to capture about 75% of the up of the [full] index and about 50% of the downside” over long periods, Invesco senior ETF equity strategist Nick Kalivas said in an interview Jan. 10.

Here’s a 15-year chart comparing the two:


Once again, the SP 500 Low Volatility Index shines when compared to the entire SP 500 Index.

Not a short-term hedge

Kalivas said, “We always tell people it is always best to buy insurance before the fire.”

Unlike some ETFs, including leveraged and inverse products that are designed to help traders hedge risks or take advantage of special opportunities on a single day, the low-volatility ETFs are meant to be held for the long term.

He called the focus on stocks with low price volatility “a rewarded investment factor.”

“When you look at the academic research and the studies in finance, there is a general consensus that value, momentum, quality and dividend are factors, or investment strategies, that tend to generate high performance over longer investment cycles,” Kalivas said.

Portfolio weighting

Like the SP low-volatility indexes, the three Invesco low-volatility ETFs are reverse-weighted by volatility, so that the least volatile stock will have the heaviest weighting. That being said, they are not weighted heavily: The largest holding of the SP 500 Low Volatility ETF is Coca-Cola

KO, +1.07%

which makes up 1.26% of the portfolio, while the smallest is Laboratory Corp. of America Holdings

LH, +0.93%

which makes up 0.73% of the fund.

Here are the top 10 holdings of the SP 500 Low Volatility ETF as of the close on Jan. 9:

Company Ticker Share of portfolio Coca-Cola Co.

KO, +1.07%

1.26% Republic Services Inc.

RSG, +0.87%

1.21% Exelon Corp.

EXC, +1.71%

1.19% Duke Energy Corp.

DUK, +0.54%

1.18% WEC Energy Group Inc.

WEC, +1.77%

1.17% Waste Management Inc.

WM, +1.44%

1.16% CMS Energy Corp.

CMS, +1.96%

1.16% NextEra Energy Inc.

NEE, +1.50%

1.15% Diamond Energy Inc.

D, -0.44%

1.15% Ecolab Inc.

ECL, +0.62%

1.14% Source: FactSet

Don’t miss: These dividend stocks beat the Dow and SP 500 through thick and thin

Create an email alert for Philip van Doorn’s Deep Dive columns here.

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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