The low volatility factor is one of the more beloved investment factors, but it approaches it via ETFs are often prosaic and can leave investors wanting more in terms of returns. The VictoryShares US Multi-Factor Minimum Volatility ETF (VSMV) looks to solve the conundrum.
VSMV follows the Nasdaq Victory US Multi-Factor Minimum Volatility Index, providing the fund with a potentially superior mousetrap than simply owning a basket of the lowest volatility equities – an approach that has plenty of drawbacks.
“Some early iterations of low-volatility strategies accomplish this by simply screening for the least volatile stocks,” according to Nasdaq Global Indexes. “The drawback of this approach is that these portfolios often have large sector and industry concentrations, making them less appealing to investors looking for diversified market exposure. In an attempt to address this shortcoming, a second generation of low-volatility strategies emerged.”
New low vol ETFs may go further than their old guard rivals, but in many cases, VSMV is still the better bet.
VSMV’s proprietary multi-factor model seeks to identify companies with the strongest fundamental profile, with an emphasis on quality, value, and momentum. Therefore, versus its single factor peers, VSMV constructs a low volatility portfolio of companies that also have attractive fundamental profiles. This multi-factor exposure differentiates it from many low-volatility strategies.
VSMV’s underlying index “attempts to enhance the methodology by including a multi-factor screening process that first narrows the investable universe to stocks believed to be more likely to outperform, then applies a portfolio optimizer to lower volatility and diversify the index,” according to Nasdaq.
VSMV starts with a universe of mid- and large-cap U.S. companies taken from the Nasdaq US Large Mid Cap Index and then ranking the companies using a number of proprietary fundamental factors like dividend yield, sales growth, and other financial metrics identified by a quantitative multi-factor selection process to identify those most likely to outperform the broader market. Furthermore, the underlying index uses an optimization tool to weight individual securities to minimize absolute volatility.
At the sector level, VSMV departs from its rivals by eschewing large weights to real estate and utilities stocks. In fact, those sectors combine for just 1.46% of the ETF’s weight.
VSMV is also backed by compelling history because its underlying index, since 2006, has topped growth, momentum, quality and value strategies as well as dividend and buyback indexes, according to Nasdaq data.