Equities posted their third straight quarter of negative returns as the Federal Reserve’s aggressive interest rate hike negatively impacted equity valuations. And the latest jobs report led to another slide in stocks, signaling that investors expect the Fed to continue its hawkish approach to rein in inflation.
This has led investors to be more risk averse and turn to lower volatility strategies. In fact, State Street Global Advisors reported that low-volatility equity ETFs saw a record $4 billion in inflows in September.
“[S]Strong inflows into low-volatility funds reflect the most dominant buying behavior trend right now: risk reduction,” according to SSGA. “Until market volatility subsides (a strong expectation given the confluence of risk flashpoints, both macro and micro), this trend is not expected to slow. Net outflows from the sector, some Inflows from the defensive sector and more flows into low volatility factor funds than into sector funds are likely to continue.
Investors looking to be less broke by volatile markets may want to consider the American Century Low Volatility ETF (NYSE Arca: LVOL)which seeks to follow the market over the long term while offering less volatility, especially during downturns.
Benchmarked against the S&P 500, LVOL is an actively managed fund that seeks to provide lower volatility than the overall market by filtering out asymmetric or downside volatility and investing in companies with strong and steady growth. It seeks to reduce volatility both at the level of the portfolio and of its individual securities. Portfolio managers seek to balance returns with risk management by evaluating individual securities and their place and performance within their sector and overall.
The fund’s managers use quantitative models to select stocks with attractive fundamentals that they believe will provide returns that reasonably track the market over the long term while seeking less volatility.
When the fund launched last year, Ed Rosenberg, head of ETFs at American Century, said LVOL enables “an agile approach that can adapt to quantitative information and challenging market conditions.”
LVOL’s portfolio managers aim to deliver market returns in normal markets while losing less in downturns by correcting the shortcomings of low volatility indices.
“We emphasize strong fundamentals in an effort to limit the potential risk of speculative companies with questionable earnings,” Rosenberg added. “We are also expanding risk metrics beyond volatility to capture other downside and balance sheet risks while focusing on volatility at the portfolio level as well as at the individual stock level.”
LVOL has an expense ratio of 0.29%.
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