Clean exposure to low-volatility U.S. stocks

PowerShares strategy provides a smoother ride than the S&P 500, but lacks sector constraints.

Alex Bryan 13 September, 2016 | 5:00PM

The strategy of PowerShares S&P 500 Low Volatility (CAD Hedged) Index (ULV) and its U.S.-listed sibling  PowerShares S&P 500 Low Volatility (SPLV) is to aggressively pursue large-cap stocks with low volatility. This should offer a smoother ride and better risk/reward profile than the S&P 500 and most of its peers. But it doesn't constrain sector weightings or turnover, which can be high.

Each quarter, the strategy 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.

This is a fluid portfolio, but the holdings tend to enjoy more stable cash flows than the typical constituent of the S&P 500. These include names such as  Waste Management (WM),  AT&T (T),  Coca-Cola (KO),  Clorox (CLX) and  Johnson & Johnson (JNJ). Because there are no limits on sector weightings, the portfolio can end up with large sector bets. But these tilts can shift over time as levels of volatility among the stocks in each sector change. For instance, in June 2016, the exposure to utilities stocks stood at 22% of the portfolio, up from 3% a year earlier. During that same span, the exposure to financial-services stocks fell to 13% from 23%.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
AT&T Inc38.39 USD-0.57
Clorox Co164.66 USD0.30
Coca-Cola Co60.04 USD0.54
Johnson & Johnson149.87 USD1.01
Waste Management Inc124.64 USD0.48

About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA, is director of passive strategies for North America at Morningstar. Before assuming his current role in 2016, he spent four years as an analyst covering equity strategies. He holds an MBA with high honors from the University of Chicago Booth School of Business.