Aggressive Rate Hikes May Worsen Volatility

The Fed raised interest rates an additional 75 basis points last month to a target range of 2.25% to 2.5%. This marks the Fed’s fourth hike of the year, matching June’s 0.75% rate hike.

Rising rates and inflation also contribute to high costs and lower profits, not to mention a murky economic outlook that makes growth stocks less appealing to investors.

“The market constantly assesses whether these policy measures are working to achieve a soft landing,” according to American Century Investments. “Are the Fed’s actions too little too late? Or are the increases too much too fast? We expect continued volatility as investors search for clues in economic, employment, and corporate earnings data.”

Investors looking to get less whipsawed by volatile markets may want to consider the American Century Low Volatility ETF (LVOL C+), which looks to track the market long-term while also offering less volatility, especially in downturns.

Benchmarked against the S&P 500, LVOL is an actively managed fund that seeks to offer lower volatility than the overall market by screening for asymmetric, or downside, volatility as well as investing in companies with strong, steady growth. It looks to reduce volatility both at the portfolio level and in its individual securities. The portfolio managers seek to balance returns with risk management by evaluating the individual securities and their place and performance within their sector and overall.

The fund’s managers use quantitative models to select securities with attractive fundamentals that they expect will provide returns that will reasonably track the market over the long term while seeking less volatility.

When the fund was launched last year, Ed Rosenberg, head of ETFs at American Century, said LVOL enables “a nimble approach that can adapt to quantitative insights and challenging market conditions.”

LVOL’s portfolio managers aim to deliver market returns in normal markets while losing less in drawdowns by correcting for the shortcomings of low-volatility indexes. “We’re emphasizing strong fundamentals in an effort to limit potential risk of speculative companies with questionable profits,” Rosenberg added. “We’re also expanding risk measures beyond volatility to capture other downside and balance sheet risks while focusing on volatility at the portfolio level as well as the individual stock level.”

LVOL has an expense ratio of 0.29%.

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