Low volatility equities were off to hot start to the year but have lagged the market recently. Today, we evaluate their outlook after the market's rally.
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Low volatility equities were off to a hot start earlier this year, as rising tariff fears saw the market pivot to slightly more defensive positioning. That movement led to a significant increase in strength for the Invesco S&P 500 Low Volatility ETF (SPLV), especially compared to the SPDR S&P 500 ETF Trust (SPY). SPY moved to a relative strength sell signal versus SPLV in March for the first time in 17 years, which has historically been a consistent relationship. Meanwhile, the fund score for SPLV moved ahead of SPY in April for the first time since the start of 2023. However, with the market rallying significantly off its bottom the last two months, the picture for low volatility equities has changed notably.
SPLV is up 6.4% from its bottom in April, but that pales in comparison to the 21.1% gain for SPY from its lowest close. As a result, we’ve seen SPY reverse back up into a column of Xs on its RS chart versus SPLV, with it now two boxes away from returning to a buy signal. Additionally, SPY is back to holding a sizable fund score lead at 4.70 compared SPLV’s 3.76 score. Overall, the S&P 500 has solidified its lead over its low volatility counterpart, mirroring the broader shift in market posture to more risk-on areas.
Near the start of April, SPY was underperforming SPLV by as much as 14.1% across the previous two months. However, recent market action has completely reversed that trend, as SPY has outperformed SPLV by 11.2% across the last two months. Instances in which that spread hits 10% in favor of SPY are quite rare, happening only 10 other times since SPY’s inception in 1994. Previous instances have been mostly favorable for the S&P 500, especially over the next six months. SPY has seen a one-year aver return of 10.9% and a 13.1% median return. Meanwhile, SPLV continued to underperform more times than not with a one-year average return of 7.0%. More broadly, the shift away from low volatility equities serves as further confirmation of deterioration among certain defensive segment and a return to strength for the core of the market.
