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

Mutual Funds

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 S&P 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 S&P 500 Index dropped 14%.

S&P Dow Jones Indices maintains the large-cap benchmark S&P 500 Index

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SPX, -0.58%

as well the S&P 400 Mid-Cap Index

MID, -0.27%

and the S&P Small-Cap 600 Index

SML, -0.12%

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

AMZN, -0.44%


MSFT, -1.22%


AAPL, -0.84%


GOOG, -1.68%

GOOGL, -1.65%

 and Facebook

FB, -0.82%

— 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, S&P 500 investors felt the pain.

S&P Dow Jones Indices also developed low-volatility versions of the broad indexes. The S&P 500 Low Volatility Index includes the 100 S&P 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 S&P 400 Mid-Cap Index and the S&P 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 S&P 500 Low Volatility ETF

SPLV, -0.36%

-5% 0% 35% 59% 116%
S&P 500 Index

SPX, -0.58%

-14% -6% 34% 41% 102%
Invesco S&P Mid-Cap Low Volatility ETF

XMLV, -0.44%

-8% 0% 47% 75% N/A
S&P Mid-Cap 400 Index

MID, -0.27%

-18% -12% 34% 30% 95%
Invesco S&P Small-Cap Low Volatility ETF

XSLV, -0.34%

-13% -5% 47% 62% N/A
S&P Small-Cap 600 Index

SML, -0.12%

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

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

You can see that the Invesco S&P 500 Low Volatility ETF

SPLV, -0.36%

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

The Invesco S&P Mid-Cap Low Volatility ETF

XMLV, -0.44%

 and the Invesco S&P Small-Cap Low Volatility ETF

XSLV, -0.34%

 were established in February 2013.

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


Yes, the full S&P 500 beat the S&P 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 S&P 500 Low Volatility Index during 2008. Let’s look at an 11-year chart:


Now the S&P 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 S&P 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 S&P 500 Low Volatility Index shines when compared to the entire S&P 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 S&P 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 S&P 500 Low Volatility ETF is Coca-Cola

KO, +0.30%

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

LH, +0.11%

which makes up 0.73% of the fund.

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

Company Ticker Share of portfolio
Coca-Cola Co.

KO, +0.30%

Republic Services Inc.

RSG, -0.16%

Exelon Corp.

EXC, +0.35%

Duke Energy Corp.

DUK, -0.29%

WEC Energy Group Inc.

WEC, -0.14%

Waste Management Inc.

WM, +0.17%

CMS Energy Corp.

CMS, -0.08%

NextEra Energy Inc.

NEE, -0.08%

Diamond Energy Inc.

D, -2.03%

Ecolab Inc.

ECL, -0.72%

Source: FactSet

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

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