Low volatility exchange traded funds have had their heyday, soaring to prominence in the wake of the global financial crisis. But as U.S. stocks soared last year, popular “low vol” ETF performed as expected, meaning they lagged broader market indices.
“Low or ‘minimum’ volatility funds have become more popular since the 2008 meltdown. They buy mostly defensive stocks with high dividends and modest price variations, and represent an $11 billion market for moderately risk-averse investors,” Reuters reported.
The dominant names among low vol ETFs are the PowerShares S&P 500 Low Volatility Portfolio (SPLV) and the iShares MSCI USA Minimum Volatility ETF (USMV) . SPLV and USMV combine for over $6.1 billion in assets under management. Although both ETFs are true to their low volatility missions, there are key differences between the two funds. [Key Differences Between Low Vol ETFs]
Differences and nuances between the two ETFs are integral in the decision-making process for investors and explain why SPLV and USMV do not move in perfect lockstep with each other. Both ETFs lagged the S&P 500 last year in what was an overt bull market for U.S. stocks, but USMV outperformed SPLV due in large part to the former’s health care exposure.
USMV allocates 19.2% of its weight health care stocks whereas SPLV is even more conservative with a 25.1% weight to utilities and a 20.3% weigh to consumer staples names, according to PowerShares data.
While low vol ETFs have proven popular and effective in the right market environments, there are important factors to consider in addition to the obvious differences between USMV and SPLV.
“Whatever path you take, do not confuse low-volatility funds with no volatility. All low-volatility stock funds will still react to market swoons. And concentrating too much on defensive stocks will certainly create a drag on performance if growth still dominates. But that may not be a bad thing if you want to focus on total return over the long haul,” according to Reuters.
Earlier this month, S&P Capital rated SPLV marketweight and USMV overweight.
“While past performance is not indicative of future results and should not be the sole driver of ETF selection in our opinion, we think looking at how these two different approaches has worked in recent years is enlightening. In addition, we encourage an understanding of where the sector/country representation of each ETF,” said S&P Capital IQ in a research note. [Loving Low Vol ETFs Again]
Income investors looking to combine yield and low volatility stocks under one ETF umbrella can consider the PowerShares S&P 500 High Dividend Portfolio (SPHD) . SPHD debuted in October 2012 and now has almost $138 million in assets. Like SPLV, SPHD is utilities-heavy with a weight to that sector of almost 26%. SPHD has a trailing 12-month dividend yield of 3.45% and annual fees of 0.3%.
PowerShares S&P 500 Low Volatility Portfolio
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.