SPLV: Think Twice Before You Buy This Low Volatility ETF

seekingalpha05-23

DNY59Investment Thesis On October 7, 2023, I recommended that readers avoid the Invesco S&P 500 Low Volatility ETF (NYSEARCA:SPLV) and suggested that the iShares MSCI USA Min Vol Factor ETF (USMV) was...

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href=https://seekingalpha.com/article/4695112-splv-think-twice-before-you-buy-this-low-volatility-etf><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>DNY59Investment Thesis On October 7, 2023, I recommended that readers avoid the Invesco S&P 500 Low Volatility ETF (NYSEARCA:SPLV) and suggested that the iShares MSCI USA Min Vol Factor ETF (USMV) was...</p>\n\n<a href=\"https://seekingalpha.com/article/4695112-splv-think-twice-before-you-buy-this-low-volatility-etf\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0738911758.USD","symbol_name":"Blackrock Global Equity Income A6 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Absolute Alpha A Acc USD","BK4016":"铁路","IVV":"标普500指数ETF","LU1718418525.SGD":"JPMorgan Investment Funds - Global Select Equity A (acc) SGD"},"translate_title":"SPLV：在你购买这种低波动性ETF之前要三思","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"QLV":1,"VFMV":1,"BRK.B":1,"FDN":1,"USMV":1,"RSG":1,"UNP":1,"RSG.AU":1,"KO":1,"SPY.AU":1,"SPY":1,"SPLV":1,"VOO":0.9,"SPXU":0.6,"SH":0.6,"SDS":0.6,"SSO":0.6,"UPRO":0.6,"OEX":0.6,"OEF":0.6,"ESmain":0.6,"IVV":0.6,".SPX":0.6},"content_text":"DNY59Investment Thesis On October 7, 2023, I recommended that readers avoid the Invesco S&P 500 Low Volatility ETF (NYSEARCA:SPLV) and suggested that the iShares MSCI USA Min Vol Factor ETF (USMV) was a suitable alternative. Since that article was published, SPLV has lagged behind USMV by 2.24% (14.60% vs. 16.84%) on total returns, continuing its lengthy streak of underperforming its peers. While past performance does not predict future results, SPLV's track record suggests potential problems with the strategy. This article explores these potential issues by highlighting how well it scores on critical factors like value, growth, momentum, and quality. Of course, SPLV emphasizes volatility well, but low-volatile stocks don't always outperform enough in market downturns, and more balanced ETFs like USMV are more appropriate for risk-averse investors. As such, I've assigned SPLV a neutral \"hold\" rating, and I look forward to explaining why in more detail below. SPLV Overview Strategy Discussion SPLV tracks the S&P 500 Low Volatility Index, selecting and inversely weighting the 100 least volatile S&P 500 Index stocks. The Index provider calculates volatility using one-year daily price returns over the last year and reconstitutes each February, May, August, and November. As of May 21, 2024, SPLV had a moderate 0.25% expense ratio and $7.10 billion in assets. The frequent rebalancing provides investors with consistent exposure to the volatility factor, and a review of the fund's historical portfolio rates suggests this may be necessary. From 2019-2023, portfolio turnover ranged from 51-86%, and while some is just rebalancing the same stocks to their target weights, new stocks are often substituted each quarter. For example, SPLV now holds 30 new stocks compared to October 2023, including nine in the Industrial sector. InvescoPerformance Analysis SPLV launched on May 5, 2011, with USMV launching five months later. I assume there was a race to be first to market, as several fund providers realized there was a market for investors looking for an easy way to avoid the market crash that occurred a few years prior. However, the market has demonstrated incredible strength since. The performance statistics below cover the period from November 1, 2011, to May 20, 2024, highlighting how SPLV has lagged the SPDR S&P 500 ETF (SPY) by 3.76% per year. Portfolio VisualizerThe Sortino Ratio, a standard measure of downside risk-adjusted returns, is most relevant for risk-averse investors. Unfortunately, SPLV's 1.25 figure is well-behind SPY's 1.47, indicating its returns were insufficient to compensate investors for lower downside risk. Meanwhile, USMV's 1.49 figure suggests the opposite. To determine what happened, I exported the monthly returns for these three ETFs and discovered the following: 1. SPY delivered negative returns in 45/151 months between November 2011 and May 2024. In those months, SPLV outperformed USMV 26/45 times by 0.88% per month on average. For the 19/45 times it underperformed USMV, it did so by 0.74% on average. 2. SPLV declined by 5% or more eight times compared to six and twelve times for USMV and SPY, with average losses of 7.26%, 7.52%, and 7.65%. These observations indicate that SPLV was no better than USMV and SPY at protecting against large monthly losses, which I defined as 5% or more. While it did perform better than USMV when the market declined by less than 5%, that's not what risk-averse investors need. Most understand that all U.S. Equity ETFs have downside risk, but when an ETF barely beats the market in its worst months, like March 2020 and September 2022, it's fair to question SPLV's purpose. SPLV Analysis Sector Exposures and Top Ten Holdings SPLV differs from USMV in that it does not follow a sector-neutral strategy. As shown below, there is minimal exposure to Technology, a sector that comprises 25.14% of USMV. Instead, SPLV overweights Financials and Consumer Staples at 19% each, followed by 18% and 14% for Utilities and Health Care. InvescoBerkshire Hathaway (BRK.B) is SPLV's top holding with a 1.41% weighting, followed by Republic Services (RSG) and Coca-Cola (KO) at 1.36% and 1.30%. SPLV is volatility-weighted, but the result is close to equal-weight because there isn't a wide disparity in the standard deviations of S&P 500 stocks. Even Union Pacific (UNP), SPLV's smallest holding, has a 0.86% allocation. InvescoSPLV Fundamentals By Sub-Industry The following table highlights selected fundamental metrics for SPLV's top 25 sub-industries, totaling 76.45% of the portfolio. I've also included summary metrics for USMV and SPY in the bottom rows. The Sunday InvestorHere are three observations to consider. 1. Since October 2023, SPLV's diversification has improved tremendously, as its allocation to its top 25 sub-industries decreased from 84.12% to 76.45%. Most relates to Packaged Foods & Meats, Electric Utilities, and Multi-Utilities, three segments that have underperformed over the last year. Overall, SPLV's selections are up 11.53% on a weighted-average basis over this period compared to 19.05% and 38.93% for USMV and SPY, respectively. 2. SPLV features 4.72% and 8.66% estimated sales and earnings per share growth rates, which are slightly lower than USMV despite trading at about the same 22x forward earnings valuation. SPLV's selections grew sales by an annualized 5.70% over the last five years, 1.46% less than USMV. Given these statistics, SPLV doesn't offer much \"bang for your buck.\" Its 0.75 five-year beta, while attractive, is still lower than USMV's 0.71, which is the third-lowest in the large-cap blend category. The two funds with lower betas are:  Vanguard U.S. Minimum Volatility ETF (VFMV) FlexShares US Quality Low Volatility Index Fund (QLV)  3. SPLV has an 8.74/10 Profit Score, which I calculated using Seeking Alpha Factor Grades. This score is weaker than USMV and SPY's 9.16/10 and 9.31/10 scores, and it is a crucial reason for my bias against SPLV. From the table above, we can see that SPLV's high allocation to Utilities and Packaged Foods & Meats contribute negatively to the fund's quality. SPLV Factor Rankings: Large-Cap Blend Category I've also compiled rankings for SPLV, USMV, and SPY, covering ten factors against other large-cap blend ETFs. This table demonstrates how unbalanced SPLV is, as it is almost solely dependent on the market emphasizing the volatility factor. The Sunday InvestorSPLV does several \"basic\" things well, including ranking highly on size (assets under management) and liquidity (average ETF volume and volume of underlying holdings). However, its 0.25% expense ratio ranks #119/229, and despite its diversification improvements from last October, it ranks slightly below average on this metric at #144/229. SPLV and USMV rank well on risk and value, but if you're trying to decide between them, I think it comes down to quality. SPLV's 8.74/10 profit score ranks #172/229, while USMV's 9.16/10 score ranks #115/229. Since USMV is designed to perform better in \"flight to safety\" and \"flight to quality\" environments, it's the better choice. Investment Recommendation  I've assigned SPLV a neutral \"hold\" rating because, despite its low 0.75 five-year beta, it ranks average or below average on other factors like growth, momentum, quality, and sentiment. I'm pleased with recent improvements in diversification, which should lead to more competitive returns with peers like USMV, assuming market conditions do not change. However, I ask readers to consider how difficult it is to time recessions and how SPLV might not even perform well in \"flight to safety\" environments. To be sure, USMV is also unbalanced, but it has slightly better fundamentals than SPLV and is my preference in the category. Thank you for reading, and I look forward to your comments below.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2437724211"}