Sizing Up a Low-Volatility ETF

ETF Trends

PowerShares S&P 500 Low Volatility ETF (NYSEArca: SPLV) was one of the most successful new ETFs of 2011 in terms of gathering assets. The fund is designed for investors who want exposure to stocks but with a potentially smoother ride than major equity benchmarks.

“Investors are seeking a more tactical approach to investing and we believe the PowerShares Global Factor-Driven ETFs can provide an efficient means to capitalize on bull markets by adding beta to their portfolio, while having the flexibility to reduce risk in flat or bear markets by adding low volatility strategies to their portfolios,” Ben Fulton, Invesco PowerShares managing director of global ETFs, said.

Beta is a quantitative measure of the volatility of a certain stock or fund in relation to the broad market. [Chart of the Day: Low Volatility ETF]

SPLV uses a low-volatility strategy that sorts S&P 500 stocks by their trailing 1 year volatility, and picks the 100 that are least risky. Then they are weighted by their inverse risk factor. What usually pops up are the stable, consumer staples firms and defensive picks like utilities. Over the volatility in 2011, the fund was able to deliver stable returns. [ETF Spotlight: Low Volatility Funds]

Over the past 50 years, low-volatility stocks have performed almost as well as the broad U.S. market but with less risk. Overall, they have outperformed in most international markets, reports Samuel Lee for Morningstar. Lee also points out that the there are three major factors that will slow down growth going forward – deleveraging, debt and demographics. [ETFs for a Slow-Growth Economy]

PowerShares S&P 500 Low Volatility ETF

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Tisha Guerrero contributed to this article.

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