Invesco's Nick Kalivas Talks Factor Strategies at Exchange

Nick Wodeshick: Some folks might have been expecting some market volatility this year. But this recent market sell-off has really scared many investors out of tried-and-true growth strategies. Do you think now might be a good time for investors to consider pivoting to different factor strategies?

Nick Kalivas: The correction in the big names has put a spotlight on the fact that there can be flaws to market-cap-weighted strategies and a reason to diversify into value or other factor-based strategies. Investors may have been overweight towards growth. From a diversification standpoint, it’s been an opportunity to recalibrate and rethink. What’s happened is some of the earnings for those big megacap names has caused the rate of change to begin flattening in terms of revenue. They’re still very healthy, but it’s flattening. 

That said, the valuations kept going up. So, what we’ve seen is a move to converge and that’s what the correction has really been. 

Wodeshick: Are any particular factor strategies speaking to you right now? 

Kalivas: There are a number of strategies that come to mind. 

We’ve been seeing a lot of interest in our revenue-weighted product, like the Invesco S&P 500 Revenue ETF (RWL A-), which owns the S&P 500 but weighs by revenue. You get a value tilt, but you don’t have a dramatic tracking error to the S&P 500. What I’ve heard from clients in recent years has been that there’s this desire to be in value. But they seem to be hesitant because of the tracking error. It’s a dramatic difference, which is great when value is working. Although when it’s not working, it’s a difficult conversation to explain why. RWL has found a niche because it has a lower tracking value-tilted strategy. On top of that, you still get exposure to those growth names. That’s been something that we’ve seen inflows this year. 

I would also say low volatility has been an option. Our ETFs, like the Invesco S&P 500 Low Volatility ETF (SPLV A+), a strategy that has been neglected. But it’s having a great year and it’s a good diversifier for a portfolio. It’s a steadier ride given you don’t get the big ups and don’t necessarily get the big downs. It will often fall into the value category from a Morningstar style box perspective. But that’s a function of it being negatively loaded to growth.

This means it doesn’t really have value. But it’s a negative load to growth, and that makes for a nice diversifier. The other aspect of that is how the fund doesn’t have a great concentration issue due to it being weighted by the inverse of volatility. It’s not equal weight, but it performs similarly. Low vol has also provided a way to mitigate the concentration risk that’s present in the market. It help investors stay invested in what has been a crazy environment with tariffs, growth uncertainty, and sticky inflation. 

We’ve also seen interest in the Invesco S&P 500 High Div Low Volatility ETF (SPHD C+), which looks at the 50 stocks in the S&P 500 with the highest yield and lowest one-year trailing volatility. Investors have been gravitating to that one because you get a value bias to it. With the dividend, more of your return is coming from distribution as opposed to capital appreciation. In this market, the bird-in-hand is actually  coveted. People want the income as they wait out this uncertainty. They want to get more clarity on what’s going on with growth and understand what’s going to go on with policy.

Wodeshick: On the topic of low volatility strategies, are there any Invesco funds that could stand out at the moment? 

Kalivas: When investors think about low volatility, they tend to think about SPLV. But they should pay attention to the full cap spectrum. The Invesco S&P MidCap Low Volatility ETF (XMLV B+) has also had a great year. There’s this idea that mid- and small-caps will begin to perform better in the current market environment. Investors believe midcap stocks and small-cap stocks have underperformed eight out of the last 10 years. There’s also been this feeling that when the economy mends, people are going to see accelerating profit growth down the cap spectrum. Meanwhile, the big names are seeing deceleration. Therefore, investors have been much warmer to the midcap space. 

XMLV is a good way to get in that space through getting exposure to midcaps and waiting for the policy clarity as well as growth clarity to come about. Investors can weather the uncertainty through a low volatility strategy since it has performed well relative to the benchmark and compared to the other factors YTD.

Wodeshick: Toward the end of last year, there was chatter that 2025 could be the year for small-caps. We haven’t necessarily seen that play out yet. But do you still think there’s a good case for building small-cap exposure right now? 

Kalivas: Many say all the good small-caps are in private equity, and there’s not much profitability in small companies. But I believe there is a case for listed small-cap companies as well. One of the big headwinds has been profit growth. That was poor in the small- and midcap sectors the last couple years. If you look at that curve, it was decelerating, but it’s now starting to turn here. 

In my view, we’re at an inflection point. But there hasn’t been enough of a catalyst yet. For example, the Small Business Survey analyzes profit trends. And that has started to turn up, which would go well for small-cap profits. There’s also a good relationship between the Philadelphia Fed capital expenditures component. The monthly manufacturing survey tracks cap spending that has historically tended to lead small-cap profits. 

There are a few other factors that suggest we’re turning around. For industrial production in the U.S., that index level has not exceeded where we were pre-COVID. This would likely shock people, because the economy’s been pretty good. However, that index level is starting to climb up and flirting with a new high that’s above the pre-COVID high. If that happens, it would be great for small-caps as it would be more indicative of profit growth for the broader industrial sector of the economy. 

Lastly, it’s been interesting that money that was looking at small- and midcaps seemed to go overseas this year. That has been the surprise, especially with the German stimulus and the value hunting, they’ve chosen to go overseas. With this recent correction, small- and midcaps are trading at a big discount to their average valuation. Earnings could be on the cusp of an upturn. It’s at an inflection point.

I’m being optimistic, but I have to say that patience has been worn thin for many. Investors want to give up on it. However, I do think there’s an opportunity, so I’m sticking with it. Hopefully in the second half of the year when policy uncertainties settle down, we’ll see a comeback. 

Wodeshick: Are there any other factors and strategies that you think investors should be looking at building up for the long term? 

Kalivas: This market correction is a good time period to think about your portfolio. When investors think about factors, they’re the building blocks of the portfolio. Many strategies have fallen to the wayside because there’s so much focus on growth and the mega caps. This is a reason to ensure that you’ve also got weights to small-caps and midcaps. Additionally, for longer-term trends, factors that have been successful in the mid- and small-cap space seemed to be forgotten. When some investors think about mid- and small-cap exposure, they tend to gravitate to just beta or they may think about active management. However, factor strategies have a strong track record in there. 

As investors think about long term trends, look down the cap spectrum and don’t forget you can make a nice factor portfolio. There are several blends, such as quality, momentum, throw in some value there, and I mentioned low volatility earlier. Use a variety of factors to help build a portfolio with a risk/return profile that suits your objectives.

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