As investors look for ways to better manage risk and diversify their investment portfolios, more are considering smart beta or factor-based exchange traded funds.
“I think the whole focus increasingly for many clients is now the appreciation of asset allocation, so once you get that level of understanding of the risk-adjusted returns diversification, then I think the question then goes, ‘Well how can I find better tools to do that?’ And I think that’s where the factor conversation has really started to accelerate in the last year or two,” Dan Draper, Managing Director, Global Head of Invesco ETFs, said at the Morningstar Investment Conference.
For example, the Invesco S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) has been one of the most popular factor-based ETFs on the market.
Low-volatility ETFs use factor-based strategies that tilt toward companies with a propensity for lower volatility. Different issuers and index providers arrive at a basket of low volatility stocks in varying fashions. SPLV holds the 100 S&P 500 members with the lowest trailing 12-month volatility.
Investors can look to funds like the Invesco S&P MidCap Low Volatility ETF (NYSEArca: XMLV), which seeks to track the investment results of the S&P MidCap 400 Low Volatility Index. The index provider selects for inclusion in the underlying index the 80 securities that it has determined have the lowest volatility over the past 12 months out of the 400 medium capitalization securities that are contained in the S&P MidCap 400 Index.
Another option is the Invesco S&P SmallCap Low Volatility ETF (NYSEArca: XSLV) that seeks to track the investment results of the S&P SmallCap 600 Low Volatility Index. S&P DJI selects for inclusion in the underlying index the 120 securities that it has determined have the lowest volatility over the past 12 months out of the 600 small-capitalization securities that are contained in the S&P SmallCap 600 Index.
The Invesco FTSE RAFI US 1000 Portfolio (NYSEArca: PRF), which has been around since December 19, 2005, ranks among the longest running smart-beta ETFs in the U.S. markets. PRF tracks 1,000 U.S. stocks that show the highest fundamental strength based on the RAFI fundamental indexing methodology, which screens for sales, book value, cash flow and dividends.
Watch the full interview between ETF Trends CEO Tom Lydon and Dan Draper:
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