What Funds Are Out of the Kiplinger ETF 20 and Why
Low-volatility strategies disappointed, leading to four changes in the lineup.
This year, we made four changes to the ETF 20. Low-volatility strategies disappointed. Invesco S&P SmallCap Low Volatility (XSLV) is designed to offer a smooth ride in a typically rocky asset class. But during the COVID sell-off, it tumbled 44%—more than the 41% loss in the Russell 2000 small-company index. The fund was loaded with real estate, utility and financial stocks, all of which suffered during the downturn.
Low-volatility strategies are steadier than the broad market about 85% of the time, says Nick Kalivas, senior equity ETF strategist at Invesco. “This time was one of the periods in which low volatility failed to provide downside protection,” he says. A low-volatility investment strategy can work well over the long term. But it requires monitoring—more than we like for a primary holding. So we replaced it with a back-to-basics small-company index fund, iShares Core S&P Small-Cap.
For similar reasons, we’re cutting iShares Edge MSCI Min Vol USA (USMV). Over the past year, the fund lost 1.1%, compared with an 8.5% gain in the S&P 500. It held up better than the broad index during the March sell-off, but only by one percentage point. We took the opportunity to add Invesco WilderHill Clean Energy in its stead.
Low interest rates crimp bank profits, but financial firms tend to do well during economic recoveries. To balance the risks and opportunities, we’re ousting Financial Select Sector SPDR (XLF) in favor of a financial preferred-stock fund, Invesco Financial Preferred. Preferred stocks pay fixed dividends and are called “preferred” because a company must pay dividends on preferred shares before it pays common-stock dividends. This move allows us to maintain a foothold in the financial sector, but in a fund with more stability and a higher yield.
With interest rates expected to stay low for a lot longer, Pimco Enhanced Low Duration Active (LDUR) is out, too. It does well when rates rise, and we’ve got that possibility covered elsewhere in our roster with Invesco Senior Loan ETF, which holds floating-rate notes that adjust higher along with market rates. The cut makes room for a promising intermediate core bond fund, Vanguard Intermediate-Term Bond.