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Investors Really Love Low Volatility ETFs This Year

ETF Professor

One of the notable themes emerging in the world of exchange traded funds in the first quarter is investors' preference for low volatility funds.

Perhaps chastened by the fourth-quarter equity market swoon, investors are pouring into ETFs that aim to reduce volatility.

What Happened

The iShares Edge MSCI Min Vol USA ETF (CBOE: USMV) is the largest low volatility in the U.S. and is one of this year's top asset gatherers. Investors have added $3.11 billion to USMV since the start of the year, a total surpassed by just five other U.S.-listed ETFs.

USMV, which tracks the MSCI USA Minimum Volatility (USD Optimized) Index, is rewarding investors' faith. The fund is higher by 12 percent year to date.

Why It's Important

Don't forget the Invesco S&P 500 Low Volatility ETF (NYSE: SPLV), the fund that started the low volatility ETF trend in the U.S. SPLV and USMV use different approaches to deliver investors equity exposure with less volatility.

SPLV, the oldest low volatility ETF in the U.S., follows the S&P 500 Low Volatility Index, which is a collection of the 100 S&P 500 components with the lowest trailing 12-month volatility. That approach, although more prosaic than USMV's methodology, is being embraced by investors.

With year-to-date inflows of just over $1 billion, SPLV recently topped the $10 billion in assets under management mark. This year, SPLV has added more new assets than any other Invesco ETF, according to data from the fourth-largest U.S. ETF sponsor. Over the past year, investors have added $2.10 billion to SPLV, good for the second-best total among all Invesco ETFs.

What's Next

Though SPLV is sector agnostic, sectors with favorable volatility traits often keep those traits for extended periods of time. Said another way, SPLV is frequently heavily allocated to the utilities sector. That's the case today as the group represents over a quarter of the fund's weight.

The real estate sector is SPLV's second-largest sector weight at 20.38 percent. Good news for SPLV investors: utilities and real estate are two of this year's best-performing groups. On the other hand, the risk here is obvious. If Treasury yields suddenly spike, SPLV could be vulnerable due to its rate-sensitive sector allocations.

Investors should note there's a value bias with SPLV as almost 41 percent of its holdings are considered value stocks compared to less than 13 percent being growth names.

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