Invesco S&P SmallCap Low Volatility ETF XSLV provides pure exposure to the S&P SmallCap 600 Index's least volatile stocks. However, failure to account for stocks' shared risks can compromise the fund's low-risk objective, while elevated turnover dulls this fund's cost advantage.

This fund fully replicates the S&P SmallCap 600 Low Volatility Index. It filters the small-cap universe down to the 120 least volatile stocks by their trailing 12-month standard deviation of returns. The index then weights its constituents by the inverse of their standard deviation over the prior year, tilting the portfolio toward the least-volatile names. It rebalances quarterly.

Stocks' trailing 12-month standard deviations can change over time, especially during stressed markets. That can lead to large-scale portfolio changes since the fund uses this measure to select securities and weight them. As a result, this fund tends to have above-average turnover, a costly feature when applied to illiquid small-cap stocks.

Cutting back on risk may provide a smoother path. In isolation, the stock selection and weighting methodology should tamp down risk and improve risk-adjusted returns. This tends to tilt the portfolio toward value-oriented low-volatility sectors. But the lack of constraints exposes the fund to unintended biases that disrupt diversification and lead to large swings in performance. The fund tends to concentrate its holdings in financials and real estate stocks at the expense of healthcare and consumer cyclical firms. Pronounced sector bets are a mainstay here.

The coronavirus-driven selloff in early 2020 and subsequent breakout through the end of 2020 spotlighted these hidden risks. The fund trailed the Russell 2000 Index by 3.73 percentage points between Feb. 19 and March 23, 2020. The next rebalance saw dramatic changes to the portfolio since the standard deviations of its low-volatility holdings spiked. Fighting yesterday’s battle left this fund positioned poorly for the ensuing rebound. Indeed, the fund trailed the Russell 2000 Index by 52.11 percentage points from March 24, 2020, through the end of that year. It should outperform its benchmark in most down markets, but its performance in 2020 serves as a cautionary tale of the risks posed by unconstrained sector bets.

Analyst Rating

A narrow focus invites hidden risks.

Director

Bryan Armour

CareTrust REIT

LTC Properties

Prestige Brands Holdings

Four Corners Property Trust

Essential Properties Realty Trust Inc

Northwest Natural Gas

Avista

WisdomTree Inc

Getty Realty

Verra Mobility Corp

Focusing on the least-volatile small-cap stocks reduces stock-level risk, but failure to consider how these stocks fit together in a portfolio leads to other sources of risk. It merits a Process Pillar rating of Average.

Average

Process

The index management team that leads this fund is backed by a robust supporting cast of analysts and traders and a flexible technology platform. Those resources should facilitate tight index tracking, affirming the experienced group’s Above Average People Pillar rating.

Peter Hubbard, Michael Jeanette, Tony Seisser, and Pratik Doshi are named to this fund. Hubbard heads up the group. The most seasoned of the bunch, he has managed portfolios for Invesco since 2007. Jeanette started as a portfolio manager in 2008 and leads the equity group under Hubbard. Seisser and Doshi came aboard in 2013 and 2018, respectively, rounding out an experienced quartet.

Most of the day-to-day operations are left to a web of supporting portfolio managers and analysts. Invesco’s global trading desk executes all trades. That frees up the named managers to confer with index providers to ensure investability, tackle corporate actions, and improve tax efficiency, among other long-term projects. An independent risk committee monitors the operation and meets with the managers on an ongoing basis.

Invesco’s proprietary portfolio management dashboard automates much of the team’s workflow. It consolidates a wealth of fund- and index-specific information to promote close tracking. The platform does not handle every task that the team must complete, but it is flexible enough to accommodate most other features that Invesco decides to build into it.

Above Average

People

Invesco succeeds in a number of areas but also has its share of subpar offerings, along with many others that land somewhere in the middle. A mid-2023 change of CEO, from longtime chief Marty Flanagan to veteran Invesco executive Andrew Schlossberg, is noteworthy, and several other executives retired or departed in 2023. Portfolio-manager shuffles aimed at bolstering poor performers, which began under Flanagan, have continued under Schlossberg, who told Morningstar his most important aim is bolstering “investment quality.” However, major changes of direction or approach are unlikely. The firm retains a Morningstar Parent rating of Average. 
Invesco’s international-equity teams in Texas and New York remain solid. However, the extensive U.S.-equity lineup needs improvement. Fixed-income offerings run the gamut: The multisector and short-term-bond areas are good, but corporate high-yield is less impressive. The firm’s exchange-traded fund lineup includes the popular Nasdaq-focused QQQ; passive strategies make up around 37% of Invesco’s assets under management. Invesco has not been averse to trying new types of strategies, and it was among the firms that immediately launched a spot bitcoin ETF after SEC approval in early 2024.
The picture outside the United States is mixed. Fund performance has been subpar in Asia, and while the picture has brightened in the United Kingdom and Europe, that region still can’t be considered a strength.

Parent

Invesco S&P SmallCap Low Volatility ETF

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