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

In the ever-evolving world of investing, understanding various exchange-traded funds (ETFs) and their roles can make a significant difference in achieving your financial goals. One such ETF that has garnered attention among investors seeking stability over high returns is SPLV. Today, we will explore what SPLV is, along with its advantages, disadvantages, and investment strategies.

What is SPLV?

SPLV stands for the Invesco S&P 500® Low Volatility ETF. As the name suggests, SPLV aims to offer investors exposure to S&P 500 companies with the lowest realized volatility over the past 12 months.

Unlike other ETFs that aim for high growth or robust dividend yields, SPLV focuses on reducing volatility, providing a cushion during market downturns. This characteristic attracts investors who prioritize stability and lower risk, especially those nearing or in retirement.

Key Features of SPLV

• Based on the S&P 500 Low Volatility Index, comprising the 100 least volatile stocks from the S&P 500
• Monthly rebalancing to ensure that it continues to hold the stocks with the lowest volatility
• Broad sector diversification to mitigate risks associated with any single sector

By focusing on low volatility stocks, SPLV aims to protect investors from extreme price swings, providing more stable returns compared to the broader market.

SPLV Composition

SPLV includes a diverse range of companies from sectors such as utilities, consumer staples, and healthcare, known for their stable performance. Some of the top holdings often include familiar names such as Johnson & Johnson (JNJ), Procter & Gamble (PG), and McDonald's (MCD).

This ETF shies away from more volatile sectors like high-growth tech stocks, offering investors a conservative basket of stable, well-established companies.

Pros of SPLV

Reduced Volatility

The primary advantage of SPLV is its focus on lowering volatility. During market downturns, SPLV tends to experience less price fluctuation compared to broader market indices like the S&P 500. This makes it an attractive option for risk-averse investors who seek protection against market turbulence.

Defense-Oriented Exposure

SPLV has significant exposure to defensive sectors, which tend to perform better during economic slowdowns or recessions. This ETF typically includes high-quality, dividend-paying companies in sectors like utilities and consumer staples, providing a stable income stream with lower risk.

Monthly Rebalancing

To maintain its low volatility objective, SPLV rebalances its holdings monthly. This frequent rebalancing ensures that the fund consistently holds the least volatile stocks, helping to maintain its defensive posture and reduce exposure to more volatile stocks as market conditions change.

Cons of SPLV

Lower Potential for High Returns

While SPLV offers stability, it often sacrifices the potential for high returns. Given its low exposure to high-growth tech stocks and its focus on traditional, stable sectors, SPLV may underperform during bull markets when high-growth sectors lead the charge.

Lower Dividend Yields

Though SPLV includes dividend-paying stocks, its overall dividend yield may be lower compared to ETFs specifically designed for high dividend income, such as SCHD or JEPI. This makes it less appealing to investors seeking higher periodic income from dividends.

Frequent Rebalancing Costs

Despite the benefits of monthly rebalancing, this feature can also lead to higher transaction costs within the ETF, potentially reducing net returns. These costs may be passed on to investors in the form of slightly higher expenses compared to ETFs with less frequent rebalancing schedules.

SPLV Investment Strategies

SPLV is best suited for conservative investors looking for steady returns with lower risk. Below, we outline strategies to effectively incorporate SPLV into your investment portfolio.

Long-term Stability Strategy

For retirees or those nearing retirement, SPLV can serve as a cornerstone of a low-risk investment strategy. By providing exposure to low-volatility stocks with a track record of stability, SPLV helps protect portfolio value during market downturns, ensuring that you can weather economic turbulence.

Balanced Portfolio Inclusion

SPLV can also play a role in a balanced portfolio strategy. By including a portion of SPLV alongside other growth-oriented or higher-yielding investments, you can achieve a good balance of stability and growth. This approach mitigates the risk profile of your portfolio while still allowing you to benefit from the upside potential of more volatile sectors.

Dollar-Cost Averaging

Regularly investing a fixed amount in SPLV, regardless of market conditions, enables you to take advantage of dollar-cost averaging. This strategy helps smooth out the effects of market volatility over time, potentially reducing the average cost per share and enhancing long-term returns.

Conclusion

SPLV offers a unique value proposition for investors prioritizing stability and lower risk. While it may not deliver the highest returns, its focus on low volatility and defensive sectors provides a buffer against market downturns. By understanding the pros and cons of SPLV and implementing thoughtful investment strategies, you can leverage this ETF to build a resilient and lower-risk investment portfolio.

Remember, the best investment strategy is one that aligns with your risk tolerance, time horizon, and financial goals. Happy investing!