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

If you're looking for a diversified investment in the U.S. stock market but are worried about high volatility, the First Trust Horizon Managed Volatility Domestic ETF (HUSV) might be worth considering. In this blog post, we will explore what HUSV is, the pros and cons of investing in it, and some strategic ways to incorporate it into your investment portfolio.

What is HUSV?

HUSV stands for First Trust Horizon Managed Volatility Domestic ETF. It is an exchange-traded fund that seeks to provide investors with exposure to U.S. equities with lower volatility.

HUSV aims to reduce risk by focusing on stocks that are historically less volatile. Instead of targeting high-growth or high-dividend stocks, HUSV employs a strategy to select stocks that are expected to have lower overall volatility, making it less susceptible to drastic market swings.

Key Features of HUSV

• Focus on U.S. stocks with the aim of lower volatility
• Utilizes a selection process based on historical and projected volatility
• Regularly rebalanced to maintain the targeted volatility exposure

The goal is to create a diversified portfolio that includes stocks anticipated to have lower price volatility compared to the broader market.

HUSV Composition

HUSV comprises a mix of well-known U.S. companies but emphasizes those with lower price volatility. It does not disproportionately favor any single sector, although it tends to include a higher percentage of consumer staples, utilities, and healthcare stocks—sectors traditionally known for their stability.

Pros of HUSV

Reduced Volatility

HUSV's primary advantage is its reduced volatility. This makes it a good choice for risk-averse investors or those nearing retirement who want to preserve capital while still achieving some equity market exposure. Lower volatility can help smooth out returns over time, making it easier for investors to stay the course during market downturns.

Diversification

HUSV offers diversification across multiple sectors and industries, which helps to further reduce risk. By spreading investments across various sectors, the ETF mitigates the impact of poor performance in any one sector.

Professional Management

The ETF is professionally managed, which means investment decisions are made by experienced portfolio managers. Investors benefit from expert analysis and stock selection designed to achieve lower volatility.

Cons of HUSV

Lower Potential Returns

One of the primary drawbacks of HUSV is the potential for lower returns compared to more aggressive ETFs. The focus on lower-volatility stocks means the ETF might underperform during strong bull markets when high-volatility, high-growth stocks tend to dominate.

Higher Expense Ratio

Compared to some other passive ETFs, HUSV has a relatively higher expense ratio. This is due to the active management required to maintain a portfolio of lower-volatility stocks. Over long periods, higher fees can eat into overall returns.

Dividend Yield

HUSV’s dividend yield is generally modest. While it does pay dividends, the yields are often lower than those offered by high-dividend ETFs, which can be a drawback for income-focused investors.

HUSV Investment Strategies

Given its unique approach to portfolio management and risk reduction, HUSV can be a valuable addition to a well-rounded investment strategy. Here are some strategic approaches to consider:

Long-term Stability

HUSV can be an excellent core holding for conservative investors seeking long-term stability. It offers a way to gain exposure to the equity market while minimizing risk, making it suitable for those with lower risk tolerance or those who are nearing or in retirement.

Portfolio Diversification

HUSV can serve as a diversifier in a portfolio that includes more aggressive equity investments. By allocating a portion of your portfolio to lower-volatility stocks, you can help balance the risk and potentially reduce overall portfolio volatility.

Defensive Strategy

In times of economic uncertainty or market volatility, shifting some investments to HUSV can help protect your portfolio from significant losses. Given its focus on stability, HUSV often performs better during market downturns compared to more aggressive equity ETFs.

Regular Rebalancing

To optimize your portfolio, consider periodically rebalancing your holdings, including HUSV. This approach helps maintain your desired risk level and can enhance returns over time. For instance, if the market experiences significant gains or losses, rebalancing can realign your portfolio with your risk tolerance and investment goals.

Conclusion

HUSV offers a unique approach to ETF investing by focusing on lower volatility. While it may not deliver the highest returns during bull markets, its approach can provide a smoother ride with reduced risk, making it a compelling choice for risk-averse investors. Whether you're looking to diversify your portfolio, ensure long-term stability, or implement a defensive strategy, HUSV can serve as a valuable tool in achieving your investment objectives.