Low Volatility ETFs, previously among this year’s hottest corners of the ETF market, suffered outflows in the third quarter. Rising Treasury yields burned sectors that low volatility ETFs are heavy on, including consumer staples and utilities. A legitimate rotation into more cyclical sectors also sent some investors scampering out of low volatility ETFs.
In the third quarter, the iShares MSCI USA Minimum Volatility ETF (USMV) shed $1.6 billion in assets. At the sector level, roughly the same amount was pulled from the largest staples ETF, the Consumer Staples Select Sector SPDR (XLP) . [Staples, Utilities Drag on Low Vol ETFs]
The PowerShares S&P 500 Low Volatility Portfolio (SPLV), the largest low volatility ETF by assets, saw third-quarter redemptions of $283.7 million. Although U.S.-focused low vol ETFs are bit lighter in size today than they were earlier this year, some analysts still see value in funds like SPLV and USMV.
“Earlier in 2013, low volatility strategies were all the rage. In the first four months of the year, globally these ETFs attracted an average of $1.6 billion in monthly assets according to BlackRock data, more than triple the average monthly flows in 2012. However, since May the attention on them has waned with leading low volatility ETFs experiencing outflows. We think this is the result of indications beginning in May that the Federal Reserve would soon slow its bond buying program — something that to date has not occurred — and encouraging investors to look at more ‘risk-on’ equity strategies. At the same time, the relative outperformance of these low volatility strategies dissipated,” said S&P Capital IQ in a recent research note.
S&P Capital IQ has four-star ratings on Johnson & Johnson (JNJ) and PepsiCo (PEP), SPLV’s largest and third-largest holdings, though that works out to be just 2.44% of the ETF’s weight. Those stocks are also top-10 holdings in USMV’s weight, combining for 3% of that ETF’s weight. [Low Volatility ETFs Remain Popular With Investors]
“There are notable differences between them as they seek to replicate benchmarks that are run quite differently,” said S&P Capital IQ.
The marquee difference between the two funds should not be ignored at a time when Treasury yields could rise again. SPLV allocates a combined 45% of its sector weight to rate sensitive utilities and staples. USMV devotes just 23% of its weight to those sectors.
Health care and financial services are USMV’s top sector weights, combining for almost 34% and with technology getting a weight of almost 14%, USMV is a bit more “risk on” and less rate sensitive than its rival S&P Capital IQ rates both ETFs Overweight.
iShares MSCI USA Minimum Volatility ETF
ETF Trends editorial team contributed to this post.
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