Recently I received an email from a reader asking a question that is perhaps too common. The following is an excerpt from the email:
‘I need growth but I cannot afford to take risks. The Arora Report says: Our proprietary algorithms generate actionable signals based on the unique ZYX Change Method after analyzing.
• Economic data from 23 countries
• Macro trends
• All major currencies
• All major commodities
• Geopolitical considerations
• Technology/Science developments
• All major industries
• 3000 U.S. stocks
• 1000 International stocks
• Trends in bonds all over the globe
With all of this data and sophisticated algorithms, what single investment do you recommend? ‘
My answer is PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA:SPLV). S&P 500 consists of 500 stocks. This ETF picks 100 stocks out of the 500 that have realized the lowest volatility over the past 12 months. In this market environment, low volatility roughly equates to lower risk. The ETF automatically rebalances every quarter.
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If we enter a roaring bull market based on renewed economic growth in the United States, SPLV should perform well. On the other hand, if the market deteriorates, we will be in a very defensive position. In the current environment, this is a defensive way to generate alpha, i.e., excess return without taking excess risk.
Our main concern is earning excess risk-adjusted returns, i.e., we want to earn returns above the fair compensation for the risks we have undertaken. Using the ZYX Change Method, the following diagram shows the risk/reward ratio.
The chart below compares the price action of SPLV with SPY. SPY holds all 500 stocks in the S&P 500 index. The reader can readily see that in this downturn, SPLV has outperformed SPY by about 7%.
As a full disclosure, the ZYX Global Multi-Asset Allocation Alert lower risk model added an allocation to SPLV recently. This lower risk model attempts to take on 50% of the overall market risk.
Disclosure: I am long SPLV. Subscribers to ZYX Global Multi-Asset Allocation Alert may also be long SPLV.