Shield Your Portfolio From Aug. 1 Tariffs With This Low-Vol ETF
If there is one thing investors learned this year, it’s that they need to understand how to navigate uncertainty.
From President Trump’s Liberation Day announcements on April 2 and the ensuing market correction, to his 90-day tariff pause announced April 9 and the market’s subsequent rebound, investors have been whiplashed with volatility not seen since the onset of the pandemic.
Volatility, as measured by the CBOE Volatility Index(CBOE: VIX), reached a five-year high of 52.33 on April 8. Looking beyond March 2020, the last time the VIX registered a reading that high was October 2008 amid the throes of the Great Recession. But since the beginning of May, the situation has dramatically improved. The VIX’s current reading of 15.94 is below its five-year average of 18.55.
However, with the White House officially declaring that tariffs will resume for countries that fail to make a deal with the administration by Aug. 1, conservative investors or those with shorter horizons should be preparing their portfolios accordingly.
One way to do this is by considering low-volatility investment strategies, such as the Invesco S&P 500 Low Volatility ETF(NYSEARCA: SPLV).
How the SPLV Helps Reduce Portfolio Shocks
The SPLV was designed for investors with lower risk appetites. It offers a safe haven in equities, allowing shareholders to maintain market exposure during downturns without having to entirely retreat to cash, alts, or fixed income.
The SPLV invests at least 90% of its holdings in companies comprising the S&P 500 Low Volatility Index, which tracks the 100 least volatile stocks in the namesake benchmark. Constituents are weighted inversely to their volatility, with the least volatile stocks receiving the highest weightings.
Like the underlying index, the SPLV is rebalanced and reconstituted quarterly in accordance with a volatility-driven weighting method. That has enabled the fund to grow steadily while offering investors value and safety: since its inception on May 6, 2011, the SPLV has gained nearly 192%.
The ETF’s forward P/E is 21.41 versus the S&P 500’s 22.6. While that may not seem staggeringly different, it’s just one of several metrics demonstrating the SPLV’s fundamental edge over market-cap-weighted S&P 500 index funds. It also provides investors with a marginally better P/S multiple of 2.39 against the S&P 500’s 3.18, boasts a P/CF of 29.15 compared to the S&P 500’s 29.66, and has a P/S of 3.51 versus the S&P 500’s 4.94.
SPLV's Defensive Edge: Big and Boring Holdings
Because the SPLV only tracks the 100 lowest volatility stocks, investors are not subject to all 503 stocks represented in the S&P 500. Its top five holdings by weight include:
- Evergy(NASDAQ: EVRG): 1.28%
- Coca-Cola(NYSE: KO): 1.22%
- Atmos Energy(NYSE: ATO): 1.14%
- Church & Dwight(NYSE: CHD): 1.14%
- Linde(ETR: LIN): 1.14%
Those weightings are another reason the SPLV offers safety. Whereas weighted index funds often favor large-cap tech companies (e.g., the Magnificent Seven), none of the allocations in the SPLV currently exceed 1.28%.
To illustrate how conservative that approach is, Microsoft(NASDAQ: MSFT), NVIDIA(NASDAQ: NVDA), and Apple(NASDAQ: AAPL) account for 19.43% of the Vanguard S&P 500 ETF(NYSEARCA: VOO) total weight.
The SPLV’s holdings are intentionally spread across sectors with historically lower volatility. Utilities, financials, consumer staples, and industrials presently account for 66% of the portfolio. By contrast, the S&P 500 is weighted 33.1% to information technology, and another 34.2% to financials, consumer discretionary, and communication services.
While the SPLV can help insulate investors from heightened market volatility, by no means is it impervious to it. However, because of its well-designed portfolio allocations and egalitarian weightings, it’s able to better weather downturns.
Take, for instance, the broad losses experienced across U.S. equities in Q2. In the wake of Liberation Day, while the S&P 500 fell by 12.14% from April 2 to April 8, the SPLV only fell 8.88%.
Lower Growth Can Still Mean Better Returns
By its very nature, the SPLV is unlikely to ever outperform the S&P 500. But that’s moot given that it isn’t an ETF for growth-focused investors.
Rather, it’s a device that can help forward-thinking investors with shorter horizons mitigate risk when volatility is looming.
Still, the SPLV has performed admirably. The fund is up 4.25% YTD versus the S&P 500’s 6.73%, and over the past year, it has gained 12.16% to the S&P 500’s 12.31%.
Meanwhile, the ETF pays a monthly distribution that currently yields 2.10%, or 12 cents per share, in June.
Learn more about SPLV
