TheÂ Invesco S&P 500 Low Volatility ETFÂ (SPLV), a portfolio of 100 S&P stocks that have exhibited the lowest levels of volatility over the past 12 months, changed its stripes in its May rebalancing. The fund swapped traditionally low-volatility stocks includingÂ Consolidated EdisonÂ andÂ McDonaldâ€™sÂ for names such asÂ AmazonÂ andÂ eBay, a notable shift from its historical focus on value plays.
SPLVâ€™s largest sector allocations are now health care at 25.5%, consumer staples at nearly 23% and industrials at about 16%. Tech stocks make up roughly 8.5% of the portfolio.Â Verizon Communications,Â CernerÂ andÂ Clorox are currently the fundâ€™s top holdings.
SPLV is down more than 15% year to date while the S&P has fallen 6.5%.
â€śWeâ€™re just in a rotation from two defensive sectors to another two defensive sectors,â€ť CFRAâ€™s Todd RosenbluthÂ told CNBCâ€™sÂ â€śETF Edgeâ€ťÂ on Wednesday, referring to SPLVâ€™s move out of utilities and real estate stocks into health care and staples.
â€śWhat also caught my eye is this ETF now actually has more exposure to technology stocks,â€ť said Rosenbluth, his firmâ€™s senior director of ETF and mutual fund research.
At its current weighting, tech accounts for more of SPLVâ€™s portfolio than utilities and real estate combined, Rosenbluth said.
â€śSPLV has always been underweighted towards the growthier sectors like technology, unlike USMV, which isÂ iSharesâ€™ Minimum Volatility ETF,â€ť he said. â€śItâ€™s now owning what are the most recently low-volatility stocks. So, itâ€™s actually doing what youâ€™d want it to do; itâ€™s rotating away from what had been previously low vol but then spiked a bit.â€ť
â€śThese ETFs rebalance. Itâ€™s important, if you own them, to make sure you look inside and use third-party research to be able to help you validate that,â€ť he said. â€śDonâ€™t just buy it and hold it and forget about it, but make sure you understand.â€ť
Salvatore Bruno, chief investment officer at IndexIQ, said sector selection plays an important role when it comes to mitigating volatility.
â€śWeâ€™ve worked with S&P to create an index and an ETF that actually applies a similar concept to the high-yield corporate bond market, which in some ways has parallels to the equity market, but it actually uses forward-looking information like option-adjusted spreads and duration,â€ť he said in the same interview, referring to theÂ IQ S&P High Yield Low Volatility Bond ETFÂ (HYLV).
â€śWhat we find there is it actually does really well during periods of … heightened volatility,â€ť Bruno said. â€śSome of it is from security selection, but I think a piece of it is actually coming from the sector selection.â€ť
The strategy has been proven out by past crises, Bruno said. In the early 2000s, it went underweight media and telecom stocks during the fallout from the dot-com bubble, and in the 2007-2009 financial crisis, it shed autos and financial plays, he said.
â€śMore recently, itâ€™s been underweight things like energy and financials and overweight health care and consumer staples and communication services,â€ť he said. â€śSo, it is a little bit more forward-looking, and maybe there are clues that you can take out of the high-yield corporate bond market that maybe you could actually apply to equities. And you can invest directly in the high-yield corporate bonds as a way to potentially dampen the volatility.â€ť
SPLV fell slightly in early Friday trading. HYLV rose by less than half of 1%.
Stock futures edge up, with Wall Street set to hold on to Mayâ€™s strong gains