Want higher returns? take on more risk. This commonly accepted link between risk and return is a fundamental rule underlying the way we invest. PowerShares S&P 500 Low Volatility Portfolio (symbol SPLV) seeks to defy the conventional wisdom by aiming for better returns while cutting risk. The exchange-traded fund's strategy is based on academic research showing that low-volatility stocks — ones with less-severe price swings — may deliver better returns with a smoother ride than riskier stocks over the long haul.
The ETF is based on the S&P 500 Low Volatility index. Standard & Poor’s starts by sifting the S&P 500-stock index for the 100 stocks with the lowest volatility over the previous year. It then weights them by volatility, allocating more to the steadiest stocks. The resulting portfolio is heavy on defensive stocks, such as utilities and health care firms, and light on cyclical sectors, such as energy and financial firms. But Invesco PowerShares, the ETF’s sponsor, says the fund won’t always look this way and could change gears quickly if defensive sectors hit a choppy patch.
Thus far, the young ETF has held up well when stocks have sunk and lagged when shares have surged. In the third quarter of 2011, during which the S&P 500 fell 13.9%, the ETF shed only 4.4%. In 2012, when the S&P 500 delivered a strong 16% gain, the fund returned only 10%. The ETF has been two-thirds as volatile as the S&P 500 over the past year.
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