Investors peering under the hood could see that the top holdings in low-vol ETFs weren’t the names pushing the S&P 500 Index back to all-time highs.
For instance, State Street’s SPDR SSGA US Large Cap Low Volatility Index ETF counts Republic Services Inc. as its largest holding. It’s down 0.2% this year, while the Invesco S&P 500 Low Volatility fund’s top stock Verizon Communications Inc. has lost 6.6%.
“The fault is it’s not fundamentally based,” said John Hancock’s Miskin. “It’s on the surface in terms of analysis, it’s not about the earnings recovery that’s developing, it’s not about the rotation that’s happening.”
With economic shutdowns crippling certain industries while boosting big tech, investors are paying greater attention to metrics like cash reserves and future earnings potential.
Funds focused on growth and quality have added cash this year, along with value, which has attracted $1.1 billion in October alone.
Given the uncertainties on the horizon -- the risk of a contested U.S. presidential election, further waves of infections -- min-vol may yet come back into style. The Cboe Volatility Index spiked to a seven-week high on Tuesday as a stalemate on stimulus added to virus fears.
But low-vol’s inability to capitalize earlier this year limits the chances of a comeback, according to Scott Knapp.
“The thesis was a good one,” said the chief market strategist of CUNA Mutual Group. “The experience hasn’t been good.”
Meanwhile, a new category of products called buffer funds have been quietly taking up the slack. Offered by issuers like Allianz Investment Management and Innovator ETFs, these funds shield holders against a certain percentage of declines in exchange for a cap on gains. They’ve gathered billions this year.
“You’re getting a much more deliberate downside cap,” said Jillian DelSignore, principal at Lakefront Advisory. “As investors look for more defined outcome type of investments, those sorts of products are going to continue to be quite popular.”
This article was provided by Bloomberg News.