Potent exposure to the least-volatile members of the S&P 500.

by Alex Bryan
Invesco S&P 500 Low Volatility ETF

Invesco S&P 500 Low Volatility ETF SPLV aggressively pursues large-cap stocks with low volatility. It should offer a smoother ride and better risk/reward profile than the S&P 500. But it doesn't constrain its sector weightings or turnover, and there are cheaper alternatives. It earns a Morningstar Analyst Rating of Bronze.

Each quarter, the fund ranks the constituents of the S&P 500 by their volatility during the past 12 months and targets the least-volatile 100. It then weights them according to the inverse of their volatility, so that the least-volatile stock receives the largest weighting in the portfolio. This strategy implicitly assumes that recent volatility will persist in the short term, which has historically held. It does not consider how stocks in the portfolio interact with each other.

The fund's holdings tend to have more-stable cash flows than most stocks in the S&P 500. These include names such as Exelon EXC, Waste Management WM, and PepsiCo PEP. Because there are no limits on sector weightings, the fund can end up with large sector bets. But these tilts can shift over time. For example, at the end of May 2019, real estate stocks represented 20% of the portfolio, up from 13% a year earlier.

Reducing risk goes a long way toward improving risk-adjusted performance. Historically, there hasn’t been a strong relationship between stock volatility and returns. Less volatile stocks may be priced to offer attractive returns relative to their risk because their tendency to lag in bull markets can make them unattractive to investors focused on maximizing return.

So far, the fund has generated attractive risk-adjusted performance. From its inception in May 2011 through May 2019, the fund beat its parent index by 98 basis points annually with 22% lower volatility. More importantly, it tended to hold up much better during market downturns. Performance will not always be strong. The fund will likely lag during bull markets and probably won't generate market-beating returns over the long run. But it should continue to offer better risk-adjusted performance than the S&P 500 over a full market cycle.

Portfolio Construction

The fund employs full replication to track the S&P 500 Low Volatility Index. It warrants a Positive Process rating because it offers pure exposure to stocks with low volatility, which have historically offered superior risk-adjusted performance and will likely continue to do so. Each quarter, S&P ranks the constituents in the S&P 500 by their volatility over the past 12 months and selects the least-volatile 100 for inclusion in the index. It then weights these constituents by the inverse of their volatility, so that steadier stocks receive larger weightings in the portfolio. This approach is laudably transparent, and it offers clean exposure to the low-volatility effect. But because there are no constraints on sector weightings or turnover, the fund can end up with large sector tilts that change over time. And because it does not consider valuations in its selection process, the fund can drift across the style box. It currently straddles the large-blend and large-value market segments, but it has exhibited a greater value tilt in the past. In contrast to some of its closest peers, the fund does not how stocks in the portfolio interact with each other, which yields a less well-diversified portfolio.


Invesco charges a 0.25% expense ratio for this offering, which is low relative to the category and competitive with similar index strategy funds, supporting a Positive Price Pillar rating. However, there are cheaper alternatives. Over the trailing three years through May 2019, the fund lagged its benchmark by 30 basis points annually, slightly more than the amount of its expense ratio. This likely stems from transaction costs, including the market-impact cost of rebalancing.

S&P 500 index data: S&P 500 Copyright @ 2019

All data from Morningstar except U.S. intraday real-time exchange quotes, which are provided by BATS when available. End-of-day quotes for Nasdaq, NYSE, and Amex securities will appear 15 minutes after close. Graph times are Eastern Standard. @ Copyright 2019 Morningstar, Inc.