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Low-Volatility Funds

Low Volatility Funds

Low-volatility funds try to capture market-like returns but with less downside by screening for less volatile stocks. In theory, a low-volatility fund would lag the market slightly in good times, but somewhat out-perform during a downturn. Over time, you may not get the full returns of the market, but you may experience more stability.

So how do fund companies manage this? Many have their own proprietary method of screening stocks, but in general they hold more defensive sector stocks. Here’s a look at the sector holdings of the SPDR S&P 500 fund “SPY” vs. the SPDR SSGA US Large Cap Low Volatility fund “LGLV” and the Invesco S&P 500 Low Volatility fund “SPLV”. Data as of mid 2024.

Basic Materials 2.0% 3.5% 2.0%
Communication Services 9.4% 3.9% 2.3%
Consumer Cyclical 10.1% 9.4% 7.1%
Consumer Staples 6.0% 8.3% 18.7%
Energy 3.7% 2.9% 2.0%
Financial Services 12.2% 17.4% 17.5%
Health Care 12.1% 7.8% 9.9%
Industrials 7.8% 17.0% 16.7%
Real Estate 2.2% 10.3% 0.9%
Technology 32.2% 10.4% 9.0%
Utilities 2.5% 9.2% 13.9%

This is a good example of the different weighting methods used in low-volatility funds. LGLV and SPLV are both trying to mimic the returns of Large Cap Blend, but with lower volatility. Both over-weighted industrials and financial sercvices, but LGLV over-weighted real estate, while SPLV loaded up on consumer staples.

Low-volatility funds can be used in US Large Blend, US Large Value, US Small Blend, International and Emerging Markets asset classes.

Implementation: These are also a popular option, and their use in our portfolios can vary widely. We might use a small amount within an asset class, split the asset class 50-50 between a core holding and a low-volatility fund, or it may make up the entire asset class for smaller parts of the portfolio like Emerging Markets.