By Philip van Doorn, MarketWatch
Walt Disney/courtesy Everett Collection
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 /zigman2/quotes/210599714/realtime SPX -1.12% , as well the S&P 400 Mid-Cap Index /zigman2/quotes/219506813/composite MID +0.29% and the S&P Small-Cap 600 Index /zigman2/quotes/210599868/delayed SML -0.60% . Those are weighted by market capitalization, which means for the S&P 500 the largest five companies — Amazon.com /zigman2/quotes/210331248/composite AMZN -1.79% , Microsoft /zigman2/quotes/207732364/composite MSFT -1.24% , Apple /zigman2/quotes/202934861/composite AAPL -3.17% , Alphabet /zigman2/quotes/205453964/composite GOOG -2.38% /zigman2/quotes/202490156/composite GOOGL -2.42% and Facebook /zigman2/quotes/205064656/composite FB -0.90% — 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||/zigman2/quotes/201108430/composite SPLV||-5%||0%||35%||59%||116%|
|S&P 500 Index||/zigman2/quotes/210599714/realtime SPX||-14%||-6%||34%||41%||102%|
|Invesco S&P Mid-Cap Low Volatility ETF||/zigman2/quotes/202774584/composite XMLV||-8%||0%||47%||75%||N/A|
|S&P Mid-Cap 400 Index||/zigman2/quotes/219506813/composite MID||-18%||-12%||34%||30%||95%|
|Invesco S&P Small-Cap Low Volatility ETF||/zigman2/quotes/201457504/composite XSLV||-13%||-5%||47%||62%||N/A|
|S&P Small-Cap 600 Index||/zigman2/quotes/210599868/delayed SML||-20%||-10%||44%||36%||113%|
The three ETFs have annual expenses of 0.25% of assets.
You can see that the Invesco S&P 500 Low Volatility ETF /zigman2/quotes/201108430/composite SPLV -0.47% 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 /zigman2/quotes/202774584/composite XMLV -1.09% and the Invesco S&P Small-Cap Low Volatility ETF /zigman2/quotes/201457504/composite XSLV -0.44% 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.