What is CIL? (Pros, Cons, and Strategies)

Investing in the global market is an effective way to diversify your portfolio and hedge against domestic market risks. In this regard, the VictoryShares International Volatility Wtd ETF, commonly known as CIL, aims to provide investors with a balanced exposure to international markets. This blog post will delve into what CIL is, its advantages and disadvantages, and the strategies you can employ to maximize your returns.

What is CIL?

CIL is an international equity ETF that stands for VictoryShares International Volatility Wtd ETF. It is designed to provide a strategic way to invest in international markets by weighting holdings based on their relative volatility.

Unlike traditional international ETFs that weight holdings based on market capitalization, CIL uses a systematic methodology to weight stocks by their volatility. This approach aims to manage risk more effectively while maintaining exposure to potential growth opportunities in international equities.

Key Features of CIL

• Diversified International Exposure: CIL includes stocks from a variety of industries and countries, reducing the concentration risk associated with single markets.
• Volatility-Weighted: It uses historical volatility data to determine the weight of each stock, aiming to reduce risk and enhance risk-adjusted returns.
• Broad Market Coverage: The ETF covers multiple sectors including finance, technology, healthcare, and consumer goods.

CIL Composition

CIL includes a diverse range of stocks from companies around the world. The portfolio is regularly rebalanced based on the volatility of each stock to maintain the fund’s intended risk profile. This composition strategy ensures that no single company or sector disproportionately affects the ETF's overall performance, thereby promoting stability.

Pros of CIL

Risk Management Through Volatility Weighting

One of the most significant benefits of CIL is its unique volatility weighting strategy. Traditional market-cap-weighted ETFs often expose investors to higher risks due to the larger weights of volatile stocks. CIL mitigates these risks by assigning lower weights to more volatile stocks. This not only helps in managing portfolio risk but also improves the risk-return profile of the investment.

Diversified International Exposure

Investing in CIL provides exposure to a wide array of international stocks, thereby offering diversification benefits. With holdings spread across multiple countries and sectors, CIL minimizes the impact of poor performance in any single market or industry. This makes it a robust option for investors looking to diversify their portfolios beyond U.S. equities.

Potential for Enhanced Returns

By focusing on volatility and not just market capitalization, CIL has the potential to deliver enhanced returns. Lower-volatility stocks tend to perform better over the long run, and by prioritizing such stocks, CIL can offer attractive risk-adjusted returns.

Relatively Low Expense Ratio

CIL has a moderate expense ratio compared to other international ETFs, making it a cost-efficient option for investors. The low expense ratio helps in maximizing net returns over the long term, especially for those who plan on holding the investment for several years.

Cons of CIL

Lower Short-Term Returns

Due to its focus on volatility management, CIL may underperform more aggressive international ETFs during bull markets. Investors looking for short-term gains may find the potential returns modest compared to high-risk, high-reward counterparts.

Complexity in Strategy

The volatility-weighted approach, while beneficial, adds a layer of complexity that might not be suitable for all investors. Understanding the methodology behind CIL requires a good grasp of how volatility impacts stock performance, which can be daunting for novice investors.

Currency Risk

Investing in international ETFs exposes investors to currency risk. Fluctuations in exchange rates can impact the returns negatively. While diversification helps in mitigating some of this risk, it does not eliminate it entirely.

CIL Investment Strategies

CIL offers a range of possibilities for both conservative and aggressive investors. Below are some strategies to consider when making CIL a part of your investment portfolio.

Long-term Investment Strategy

CIL is ideal for long-term investors looking to diversify globally while managing risk. The ETF's volatility-weighted approach offers a balanced risk/return profile, making it suitable for those planning for retirement or other long-term goals.

Investing consistently and holding for at least 10 years can provide stable returns, thanks to the compounded growth attributed to low-volatility stocks. Investors should consider reinvesting any dividends to maximize the compound effect over the long term.

Balanced Portfolio Strategy

Incorporating CIL into a balanced portfolio can enhance diversification. By blending CIL with domestic equities, bonds, and other asset classes, investors can build a portfolio that is resilient to market fluctuations. This makes it easier to achieve a stable growth trajectory while protecting against country-specific risks.

Tactical Allocation Strategy

For investors who prefer a more active approach, CIL can be used in a tactical allocation strategy. By monitoring global economic conditions and rebalancing the portfolio to include more or fewer shares of CIL based on the market outlook, investors can potentially optimize returns.

Dividend Reinvestment Strategy

While CIL is not primarily a dividend-focused ETF, it does distribute dividends to shareholders. By reinvesting these dividends, investors can take advantage of the compound effect, thereby accelerating asset growth.

Conclusion

CIL offers a unique approach to international investing by weighting stocks based on their volatility. This strategy provides a balanced risk/return profile and makes CIL an attractive option for long-term and diversified investment strategies. While it comes with some complexities and risks, its potential for stable growth and risk management makes it a valuable addition to a well-rounded investment portfolio.