Divide your volatility with the CFA ETF
Some major market benchmarks may not be as diverse as investors are led to believe. Take the case of the S&P 500 where six stocks – Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), Facebook (NASDAQ: FB) and two classes of shares of Alphabet (NASDAQ: GOOG ) combine for more than 21% of the weight of the index.
This may not be the level of diversity investors are looking for, and can sometimes introduce them to more volatility than desired. the ETF VictoryShares US 500 Volatility Wtd (CFA) is an exchange traded fund that aims to rectify this scenario.
The $ 706 million CFA index, which turns seven on July 1, tracks the Nasdaq Victory US Large Cap 500 Volatility Weighted Index. This index doesn’t just include companies with four consecutive quarters of positive earnings, it weights components based on volatility. Less volatile names receive larger weights while more volatile benchmark names receive lower allocations.
The CFA could be a credible idea for investors looking for truly diversified asset-level strategies, and not just dominated by a smaller number of companies.
“Remember that in recent years the leadership of the domestic market has been dominated by a handful of mega-cap stocks. At the end of the first quarter, the top 10 stocks in the S&P 500® Index represented 27.4% of the index, ”writes Scott Kefer of Victory Capital. This type of overweighting was good when the proverbial FAANG + M stocks – Facebook, Apple, Amazon, Netflix, Google (i.e. Alphabet) and Microsoft – provided good tailwind and propelled returns in the S&P 500. . “
None of CFA’s holdings exceeds a weight of 0.40%.
CFA refreshes wide market exposure
For investors who want truly diversified exposure to large caps without concentration risk, the CFA is a convenient option. In addition, the fund’s volatility weighting methodology is suitable for risk averse investors seeking basic exposure.
“For example, a volatility weighting methodology allocates stocks based on volatility, so that each stock in the portfolio has an equal contribution to overall risk,” Kefer adds. “Not only is this a more diversified approach, but it could protect investors against the possible underperformance of mega-cap stocks relative to the broader market, while providing greater exposure to stocks and cyclical sectors. . “
Another advantage of the CFA is that by weighting stocks according to volatility, the fund is overweighting certain value sectors, namely financial services and industrials. These groups combine for more than 34% of the CFA roster, compared to less than 21% of the S&P 500.
These differences are significant as the CFA is slightly above the S&P 500 this year while beating the MSCI USA Minimum Volatility Index.
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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.