A lot goes into making a new ETF successful, and timing is often part of the equation. It can be helpful to a new ETF’s fortunes if its investment objective is applicable to the market climate when it debuts. The Invesco QQQ Low Volatility ETF (QQLV ) could prove to be an example of a rookie ETF that met with immediate relevance.
The fund debuted last month and tracks the Nasdaq Low Volatility Index. That’s a basket of the 25 least volatile stocks from the popular Nasdaq 100 Index (NDX). That DNA could be appealing to investors who want to reduce volatility, but not to the extent that upside potential is significantly limited.
QQLV allocates about a quarter of its weight to the technology and communication services sectors. The new ETF isn’t home to some of the most glamorous names from those groups. But those sectors have growth outlets . That could be a sign QQLV may be a bit more exciting than legacy funds in the “low vol” category.
QQLV Could Be Long-Term Winner
QQLV could be pertinent over the near term, particularly if President-elect Trump says or does something to rattle markets or if he’s unable to get his tax cut agenda through Congress. But it’s worth remembering that low volatility is best deployed over longer holding periods. That implies QQLV could be a credible portfolio addition for investors not needing big gains in short order.
“Historically, academic research [has found] that less volatile stocks have outperformed their more volatile peers over time,” according to BlackRock. “Investors can use minimum volatility strategies to provide ballast in their portfolios and allow them to stay invested during periods of market turmoil.”
The long-term ability and potential of low volatility investing to outperform is important. That’s because there are times when minimum volatility ETFs lag during bull markets. ETFs such as QQLV present investors with a trade-off. That trade-off is: less downside when markets tumble and less participation in strong trending bull markets. But long-term, risk-adjusted returns with low vol ETFs have been solid, and QQLV could join that group over time.
Low volatility ETFs are “designed to be less sensitive to the market’s ups and downs. Investors in these ETFs should get some cushion when the market declines, but they’ll likely underperform when it rallies. That’s not a recipe that usually produces market-beating returns, so don’t expect their long-term total returns to do so. A marketlike total return with noticeably less risk is a more reasonable expectation,” noted Morningstar analyst Daniel Sotiroff.
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