Memories are short. Did the stock market rebound this week soothe your fourth-quarter fears?
That’s why it’s an optimal time to consider ways to lower your portfolio risk. Doing so may even lead to higher returns over the long haul.
Invesco, the Atlanta-based investment-management firm known for its exchange traded funds (ETFs), runs three ETFs that hold subsets of the broad S&P indexes, with the objective of lowering investment risk. And it turns out the ETFs have actually outperformed the indexes over longer periods. They also held up better during the fourth quarter, when the benchmark S&P 500 Index dropped 14%.
S&P Dow Jones Indices maintains the large-cap benchmark S&P 500 Index SPX, -0.08% as well the S&P 400 Mid-Cap Index MID, +0.21% and the S&P Small-Cap 600 Index SML, +0.22% Those are weighted by market capitalization, which means for the S&P 500 the largest five companies — Amazon.com AMZN, -0.64% Microsoft MSFT, -1.49% Apple AAPL, -0.89% Alphabet GOOG, -1.50% GOOGL, -1.42% and Facebook FB, +0.37% — make up 16% of the index. In other words, a lot of risk is concentrated among a small group of stocks. When Apple’s shares tumbled 30% in the fourth quarter, S&P 500 investors felt the pain.
S&P Dow Jones Indices also developed low-volatility versions of the broad indexes. The S&P 500 Low Volatility Index includes the 100 S&P 500 stocks that have had the lowest price volatility over the previous 12 months. It is rebalanced quarterly. There are similar low-volatility indexes for the S&P 400 Mid-Cap Index and the S&P Small-Cap 600 Index.
Invesco manages ETFs that track all three low-volatility indexes. They’re rebalanced quarterly. Here’s how they’ve performed, for various periods:
ETF or Index Ticker Total return – Q4 2018 Total return – 2018 Total return – 3 years through Jan. 9