Advisors and long-term investors know it’s best to not get caught in stocks’ behavior over a day or even a week. Still, it’s fair to say equities were all over the place last week, likely whipsawing some jittery market participants.
However, low volatility investing can keep even the most pensive investors in the game. Many ETFs answer that call, including the Invesco QQQ Low Volatility ETF (QQLV ).
One of the newer low volatility ETFs, QQLV tracks the Nasdaq Low Volatility Index. However, its exposure to growth stocks is benign compared to the popular ETFs that track the Nasdaq-100 Index. This indicates that the “low vol” ETF can be paired with those funds or other growth-heavy ETFs.
QQLV for the Long-Term Win
ETFs like QQLV probably won’t thrill investors over shorter holding periods, particularly if growth stocks are leading. However, near-termism as it relates to low vol ETFs misses the mark. This factor has proven durable over long holding periods.
“Research dating back to 1972 has persistently found that low-volatility (or low beta) stocks have systematically provided higher risk-adjusted returns than high-risk stocks,” according to Wealth Management.
Another factor investors ought to consider is the reasons why some stocks sport higher volatility than others. In many cases, that boils down flaws such as lack of profitability or weak balance sheets. That doesn’t mean there aren’t “junk” stocks in the low volatility realm. Still, some high beta segments often have higher shares of more volatile names.
Interestingly, low volatility investing isn’t solely about managing risk, though that is a selling point. Speaking of positive attributes that could accrue for investors engaging with ETFs such as QQLV, is that reducing volatility can lead to surprising amounts of alpha generation.
“The outperformance is not fully explained by traditional risk factors or sector exposures, suggesting that investors may systematically overpay for volatile stocks or underappreciate the compounding benefits of lower volatility,” added Wealth Management. “The low volatility factor generates statistically significant alpha, even after accounting for market, size, value, and bond factors.”
Bottom line: QQLV isn’t a glamorous ETF and it’s not positioned as such, but it risk-reducing approach could be just what the doctor ordered at a time when Mr. Market can’t seem to make up his mind.
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