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A Dichotomy In This Year's Low Vol Trade

ETF Professor

For part of last year, the low volatility trade, particularly as measured by the iShares Edge MSCI Min Vol USA ETF (NYSE: USMV) and the PowerShares S&P 500 Low Volatility Portfolio (NYSE: SPLV), was scorching hot.

However, by the end of the year, investors were favoring higher beta, cyclical fare, pushing the S&P 500 to annual gain of 12 percent while SPLV and USMV finished the year with an average gain of 10.4 percent.

Year-to-date, USMV is trading slightly ahead of the S&P while SPLV is trailing the benchmark U.S. equity benchmark by a modest margin, but some signs point to a low volatility resurgence. Maybe.

Low Volatility Trades

In a note out Monday, Rareview Macro founder Neil Azous pointed out that USMV notched 13 consecutive higher closes. That streak ended Monday when USMV lost just 0.15 percent. Still, it is hard to quibble with the 4.8 percent gained by USMV over the past month, an impressive run in short order for a low volatility ETF.

Related Link: A New ETF Reduces Junk Bond Volatility

For its part, SPLV has notched 14 higher closes this month, including a string of seven, which was also snapped Monday.

Low Vol And Equity

“The persistent low volatility has no question in our mind induced further equity buying as leverage and net exposure increases,” said Azous. “Put another way, the collapse in S&P 500 1-month realized volatility has allowed risk control exposure to move back to their full investment for the first time in years.”

Still, investors are not displaying much enthusiasm for some low volatility ETFs. For example, $693.3 million has been yanked from USMV this year while nearly $248.3 million has departed SPLV. Interestingly, nearly $246 million has flowed into the PowerShares S&P 500 High Beta Portfolio (NYSE: SPHB).

USMV allocates 35.5 percent of its weight to healthcare and technology stocks while SPLV devotes 38.5 percent of its weight to utilities and consumer staples names.

It is not all bad news on the flows front for volatility ETFs. For example, the PowerShares S&P 500 High Dividend Low Volatility Portfolio (NYSE: SPHD) has added $159.1 million in new assets this year.

SPHD's status as a low volatility dividend fund might imply that it is an exclusively large-cap ETF, but the fund has decent exposure to mid-caps, another market segment where low volatility strategies are winning this year. The ETF allocates over 29 percent of its combined weight to mid-cap value and blend stocks.

The ETF devotes over 40 percent of its lineup to utilities and real estate stocks.

Disclosure: Todd Shriber owns shares of SPHD.

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