Invesco Canada blog

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Nick Kalivas | March 16, 2016

Potential for a smoother ride in all markets

The trade-off between risk and return is central to modern portfolio theory. Finance textbooks teach that the more risk an investor assumes, the greater the expected return. This is not only academic, but intuitive to most people. Following this logic, one would expect lower volatility securities to generate lower returns over time, and higher volatility securities to deliver higher returns in exchange for added risk. But this may not necessarily be the case – at least within a given asset class.

Numerous academic studies have shown that low volatility stocks have tended to outperform higher volatility stocks over time. This has become known as the “low volatility anomaly” – a phenomenon that has turned traditional finance theory on its ear, while creating compelling opportunities for investors.

A goal of partial upside participation, downside risk mitigation

PowerShares S&P 500 Low Volatility (CAD Hedged) Index ETF (ULV) is based on the S&P 500 Low Volatility Index CAD Hedged – a recognized industry benchmark for low volatility investing. The goal of ULV’s underlying methodology is to provide investors with partial upside market participation as well as downside risk mitigation. To achieve this, ULV’s underlying index overweighs low volatility stocks when compared to the S&P 500 CAD Hedged Index, – providing partial participation in rising markets, but also potentially limiting losses when stocks are falling.

PowerShares Canada has high conviction that, over time, this low-volatility approach should provide investors with less exposure to market volatility and smoother overall performance. In fact, since its January 24, 2012 inception through February 29, 2016, the S&P 500 Low Volatility Index CAD Hedged has exhibited upside capture and downside capture1 of 78% and 50%, respectively – meaning that the index has captured 78% of the gains and only 50% of the losses of the S&P 500 CAD Hedged Index.

Why is it important to consider both of those numbers in tandem? Because mitigating losses in the first place makes it easier to overcome them; it takes a 100% rally to make up a 50% loss. Notice how the S&P 500 Low Volatility CAD Hedged Index has tempered the highs and lows of the S&P 500 CAD Hedged Index in the following charts – outperforming in some of the worst months for equities.

S&P 500 Low Volatility CAD Hedged Index performance during the 10 strongest-returning months for the S&P 500 CAD Hedged Index since January 2012


S&P 500 Low Volatility (CAD Hedged) Index performance during the 10 worstreturning months for the S&P 500 (CAD Hedged) Index since January 2012


Simple portfolio construction, unconstrained sector rotations

So how is ULV’s underlying methodology designed to provide a smoother ride? The underlying S&P 500 Low Volatility CAD Hedged Index is constructed by ranking stocks from the S&P 500 Index in order of their realized volatility over the trailing 12 months. The 100 stocks with the lowest volatility are then weighted by the inverse of their volatility. The stock selection process is intentionally kept simple and transparent, and then repeated as part of a quarterly reconstitution process.

ULV has the added advantage of an unconstrained investment approach. Unlike portfolios that make use of minimum-variance constraints, ULV has the ability to rotate in and out of sectors as volatility dictates through the process of quarterly reconstitution. Below are two examples of unconstrained sector allocation in recent years.

  • Between March 2013 and June 2015, ULV shed its allocation to the underperforming utility sector from roughly 30% to less than 3%.
  • ULV has had no exposure to the underperforming energy sector since February 2015, when its weighting was cut to zero from just below 5% in August 2014. That compares with a weight of 6.5% in the energy sector within the S&P 500 CAD Hedged Index. This lack of energy exposure helped the S&P 500 Low Volatility CAD Hedged Index ETF (3.84%) outperform the S&P 500 Index (.91%) by 2.93% in 2015.

ULV’s largest sector allocation as at February 29, 2016 is in financials, which have historically shown positive correlation to rising interest rates. The chart below illustrates ULV’s sector allocation since the fund launched in 2012.

ULV’s portfolio allocation


Using low volatility in a high-conviction portfolio

Owing to the construction of its underlying index, ULV is designed to participate in rising markets, but may underperform the S&P 500 CAD Hedged Index during strong bull markets. Conversely, ULV may outperform the S&P 500 CAD Hedged Index in sustained bear markets.

Low volatility stocks also typically pay dividends, which can make for a compelling complement to a fixed income allocation. Low volatility can also be combined with other factors for a customized approach to a high-conviction investment strategy.

Learn more about the PowerShares S&P 500 Low Volatility (CAD Hedged) Index ETF by visiting


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1 Up capture measures the percentage of market gains captured by a manager when markets are up. Down capture measures the percentage of market losses endured by a manager when markets are down.

Correlation is the degree to which two investments have historically moved in relation to each other.

There can be no assurance the fund will provide low volatility.

A minimum-variance portfolio includes individually risky assets that, when taken together, result in the lowest possible risk level for a given rate of expected return.

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.

Investments focused in a particular industry or sector, such as the industrials sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

The Fund is non-diversified and may experience greater volatility than a more diversified investment.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The S&P 500® Low Volatility Index consists of the 100 stocks from the S&P 500® Index with the lowest realized volatility over the past 12 months.

The Global Industry Classification Standard was developed by and is the exclusive property and a service mark of MSCI, Inc. and Standard & Poor’s.

S&P®, S&P 500®, and S&P 500 Low Volatility Index™ are trademarks of Standard & Poor’s Financial Services LLC and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by Invesco Canada Ltd. The S&P 500 Low Volatility Index (CAD Hedged) is a product of S&P Dow Jones Indices LLC, and has been licensed for use by Invesco Canada Ltd. Invesco Canada Ltd.'s PowerShares S&P 500 Low Volatility (CAD Hedged) Index ETF is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC or its affiliates and none of S&P Dow Jones Indices LLC or its affiliates make any representation regarding the advisability of investing in such product. PowerShares Canada is a registered business name of Invesco Canada Ltd.