VettaFi head of research Todd Rosenbluth appeared on the TD Ameritrade Network’s The Watch List program Wednesday to talk about how investors have thought about risk and income in 2022 going into 2023.
Re-Balancing Key as Low-Vol ETFs Stake Their Claim
Investors have faced some notable challenges this year, from rising rates and inflation to geopolitical risk and logistics issues, adding volatility and uncertainty. That’s prompted interest in low volatility ETFs like the iShares MSCI USA Min Vol Factor ETF (USMV ) and the Invesco S&P 500 Low Volatility ETF (SPLV ), which have combined to add $5 billion in net inflows this year, Rosenbluth said.
SPLV, which just underwent its quarterly rebalance, tracks the S&P 500 Low Volatility Index and charges 25 basis points with an annual dividend yield of 1.53%, outperforming the ETF Database Category and FactSet Segment Averages.
USMV, meanwhile, tracks the MSCI USA Minimum Volatility Index, charges 15 basis points, and also outperformed its category and segment averages with a 1.38 annual dividend yield. USMV is set to rebalance Wednesday afternoon.
According to Rosenbluth, SPLV added exposure to consumer staples in its recent rebalance. At the same time, it also tends to be under-exposed to some cyclical sectors that have underperformed this year. USMV is more sector neutral, with more exposure to defensive sectors than the broader S&P 500 but less than its low-vol peers.
“It’s a really popular trend and one we think is going to continue,” Rosenbluth said.
SPLV weights utilities at 27% compared to 3% for the SPDR S&P 500 ETF Trust (SPY ), 22% for consumer staples vs. 7% for SPY, and real estate at 6% vs. SPY’s 2.7%. SPLV underweights SPY in cyclical consumer discretionary with 3% compared to SPY’s 10% and underweights it significantly in information technology at 3% compared to SPY’s 26%.
Covered-Call Strats Appeal to Advisors
Advisors are taking interest in some other strategies that can offer income amid an uncertain, rising rate environment. Rosenbluth explained that covered-call strategies, which focus on equity income but with the added benefit of a covered call, have gained significant traction with advisors at VettaFi.
“At VettaFi, we’re hearing from those advisors who are more interested in an equity income component as opposed to just having exposure to traditional corporate bonds and just getting that income component,” Rosenbluth said, with advisors perhaps concerned by how the Fed’s activity may put said bonds at risk.
The JP Morgan Equity Premium Income ETF (JEPI ) and the Global X S&P 500 Covered Call ETF (XYLD ) are two such strategies that take different approaches to equity income. While JEPI is actively managed and looks for lower-risk companies before adding on a covered call component, XYLD owns the whole S&P 500 and then adds an income component on top of that.
“We think advisors are likely to continue to gravitate towards these products as we head into 2023,” Rosenbluth said.