Defensive Factors See Resurgence During Recent Market Weakness

U.S. equities struggled last month due to volatile and increasing bond yields, third-quarter earnings releases, and geopolitical conflict. The S&P 500 fell 2.1% in October, its third monthly loss in a row.

Notably, last month marked the worst October for the S&P 500 since 2020, and the worst October since 2018 for the Nasdaq Composite.

While all the S&P 500 factor indexes declined during the month, five did manage to limit losses and outperform the S&P 500. The best relative performer was low volatility, a defensive factor that lost just 0.4%. Meanwhile, the worst performance came from high beta which dropped 8.4% during the month.

The low volatility index is down 6.6% year to date through October, but its relative performance has seen steady gains in the past three months as the parent index declined, according to S&P Dow Jones Indices.

The low volatility return profile tends to capture less downside, but also less upside. This makes it an ideal allocation for investors who want to position defensively. Low volatility may help investors maintain target equity exposure more easily during choppy markets.

“Advisors wanting to head into 2024 with lower risk equity exposure should consider lower volatility ETFs. These ETFs tend to favor the more defensive sectors like consumer staples and utilities that are less sensitive to the macroeconomy,” Todd Rosenbluth, head of research at VettaFi, said.

The Invesco S&P 500 Low Volatility ETF (SPLV A+) provides exposure to the S&P 500 Low Volatility Index.

Invesco offers access to low volatility stocks down the cap spectrum and for international allocations. These funds include the Invesco S&P MidCap Low Volatility ETF (XMLV B+), the Invesco S&P SmallCap Low Volatility ETF (XSLV B), the Invesco S&P International Developed Low Volatility ETF (IDLV A), and the Invesco S&P Emerging Markets Low Volatility ETF (EELV A-).

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