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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 late 2020.

  SPY LGLV SPLV
Basic Materials 2.3% 2.4% 1.0%
Communication Services 11.0% 3.6% 7.6%
Consumer Cyclical 11.1% 9.6% 5.8%
Consumer Staples 7.3% 4.7% 27.9%
Energy 2.5% 1.0% 0.0%
Financial Services 13.7% 22.4% 6.8%
Health Care 13.6% 7.3% 24.4%
Industrials 9.2% 14.5% 12.8%
Real Estate 2.6% 14.9% 2.6%
Technology 23.8% 14.4% 6.8%
Utilities 3.0% 5.2% 4.4%

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, but LGLV over-weighted financial services and real estate, while SPLV loaded up on consumer staples and health care.

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.