Low Volatility Landscape Gets 4 New ETFs

Seeking Alpha

By Ron Rowland:

Four new low volatility ETFs came to market this month, adding to a growing landscape of factor-based investment vehicles. Invesco PowerShares has first-mover status in the low volatility equity category with its May 2011 introduction of the PowerShares S&P 500 Low Volatility Portfolio (SPLV - News). The firm expanded that line-up in recent weeks with mid cap and small cap offerings that also follow S&P indexes. State Street SPDRs brought out its first two ETFs targeting low volatility stocks with last week's introduction of large cap and small cap funds based on Russell indexes.

PowerShares S&P MidCap Low Volatility Portfolio (XMLV - News) was launched on 2/15/13 with a 0.25% expense ratio. It will track an index composed of 80 of the 400 medium-capitalization securities from the S&P MidCap 400 Index with the lowest realized volatility over the past 12 months. S&P weights constituents by the inverse of each security's volatility with quarterly reconstitution and rebalancing. Sectors receiving allocations in excess of 5% are Financials 51.3%, Utilities 23.9%, Technology 7.2%, and Materials 5.6% (XMLV overview).

PowerShares S&P SmallCap Low Volatility Portfolio (XSLV - News) was launched on 2/15/13 with a 0.25% expense ratio. It will track an index composed of 120 out of 600 small-capitalization securities from the S&P SmallCap 600 Index with the lowest realized volatility over the past 12 months. S&P weights constituents by the inverse of each security's volatility with quarterly reconstitution and rebalancing. Sectors receiving allocations in excess of 5% are Financials 50.0%, Utilities 16.0%, Industrials 9.7%, and Healthcare 8.1% (XSLV overview).

SPDR Russell 1000 Low Volatility ETF (LGLV - News) was launched on 2/21/13 and has a 0.20% expense ratio. It will track an index that currently has 95 securities, and a maximum of 200, selected from the Russell 1000 large cap stock index. Security selection aims to deliver focused exposure to low volatility securities, while minimizing exposure to other factors. Reconstitution of the underlying index occurs monthly to maintain its focus on low volatility. Sectors receiving the largest initial allocations include Consumer Staples 20.1%, Health Care 17.4%, Utilities 13.8%, Industrials 12.5%, and Financials 8.9%. LGLV is expected to yield 2.4% (LGLV overview).

SPDR Russell 2000 Low Volatility ETF (SMLV - News) was launched on 2/21/13 and has a 0.25% expense ratio. It will track an index that currently has 164 securities, and a maximum of 400, selected from the Russell 2000 small cap stock index. Security selection aims to deliver focused exposure to low volatility securities, while minimizing exposure to other factors. Reconstitution of the underlying index occurs monthly to maintain its focus on low volatility. Sectors receiving the largest initial allocations include Financials 31.1%, Utilities 16.7%, Industrials 15.0%, Consumer Discretionary 10.1%, and Technology 9.9%. SMLV is expected to yield 2.3% (SMLV overview).

Analysis/Opinion: If the descriptions of the two new SPDR low volatility ETFs sound familiar to you, then you are not alone. They appear to be reincarnations of two successful ETFs that were part of Russell's mass closure last October when Russell made its strategic retreat from the indexed ETF business. If you go back and read the descriptions of Russell 1000 Low Volatility (:LVOL) and Russell 2000 Low Volatility (:SLVY), you will find them very similar to the descriptions of LGLV and SMLV above. Although Axioma is not identified as being part of the indexing methodology, LGLV and SMLV both have an index inception date of May 23, 2011, which coincides with the Russell launches.

One of the benefits of using established indexes is that it is much easier to determine the initial yield estimates, which the new SPDR ETFs provide. In comparison, I was not able to find yield estimates for the new PowerShares ETFs (XMLV and XSLV). A potential drawback of the S&P indexing methodology used by PowerShares is the apparent lack of constraints on sector exposure. PowerShares S&P MidCap Low Volatility Portfolio (XMLV - News) has more than 50% in Financials and more than 75% in just two sectors. Sector allocations will likely drift significantly over time, so long-term investors will need to monitor this.

PowerShares and SPDRs are not the only firms offering low volatility products. Blackrock has an iShares Low Volatility Suite and EGShares has a fund targeting emerging markets. In all, there are now a dozen products focused on low volatility equities. Some might say that is enough, while others may claim it is already too many. However, I believe the investment methodology has merit and we will likely see many more introductions before we reach a saturation point. Don't be surprised to see low volatility sector and single country funds one day.

Here are the twelve low volatility equity ETFs listed on U.S. markets:

  1. EGShares Low Volatility Emerging Markets Dividend (HILO - News)

  2. iShares MSCI USA Minimum Volatility Index Fund (USMV - News)

  3. iShares MSCI EAFE Minimum Volatility Index Fund (EFAV - News)

  4. iShares MSCI Emerging Markets Minimum Volatility Index Fund (EEMV - News)

  5. iShares MSCI All Country World Minimum Volatility Index Fund (ACWV - News)

  6. PowerShares S&P 500 Low Volatility Portfolio ((SPLV - News))

  7. PowerShares S&P MidCap Low Volatility Portfolio ((XMLV - News))

  8. PowerShares S&P SmallCap Low Volatility Portfolio ((XSLV - News))

  9. PowerShares S&P International Developed Low Volatility Portfolio (IDLV - News)

  10. PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV - News)

  11. SPDR Russell 1000 Low Volatility ETF ((LGLV - News))

  12. SPDR Russell 2000 Low Volatility ETF ((SMLV - News))

Disclosure covering writer, editor, and publisher: Long SPLV. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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