Low-volatility ETFs have been popular with risk-averse investors who want to maintain exposure to U.S. equities but some of the funds’ overweighting to the utilities sector has been a drag on performance in 2013.
PowerShares S&P 500 Low Volatility Portfolio (SPLV) is the largest ETF in the category.
Year to date, SPLV is up 14.9%, while the S&P 500 has gained 17.5%, according to Morningstar.
So far in 2013, SPLV has brought in $982 million, according to IndexUniverse flow data.
“Based on the academic research that has found that low-volatility strategies have provided market-like returns with less than market risk, they’ve become the darling of investors,” writes Larry Swedroe for CBS MoneyWatch.
However, he theorizes the popularity of low-volatility approaches has changed the nature of the investments. In particular, low-volatility ETFs have moved away from a value strategy, Swedroe said.
“The evidence behind low-volatility investing is truly impressive. However, low-volatility strategies can underperform during bull markets,” says Morningstar ETF analyst Samuel Lee in a report on SPLV.
The ETF’s biggest sector weighting is in utilities at 25.7% of the portfolio. Utilities Select Sector SPDR (XLU) has posted a total return of 9.6% this year. Utilities are one of the worst-performing sectors amid the move higher in interest rates.
The chart below shows the performance of sector ETFs against the S&P 500 this year.
The opinions and forecasts expressed herein are solely those of John Spence, 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.