As U.S. stocks have soared in 2013, one of last year’s most popular trends in the exchange traded funds world has taken some lumps. Low volatility ETFs, though not surprisingly, have lagged the S&P 500.
While the S&P 500 is up almost 27% year-to-date, the PowerShares S&P 500 Low Volatility Portfolio (SPLV) and the iShares MSCI USA Minimum Volatility ETF (USMV) are up an average of 20%. A possibly crowded trade and the second-quarter spike in interest rates due speculation of the Federal Reserve tapering its asset-buying program have hampered “low vol” ETFs this year. [Slack Utilities Stocks Weigh on Low Vol ETFs]
“The lower-volatility, more staid stocks these ETFs invest in can get downright sluggish — or, worse, excitable — if too many investors pile in,” reports Brendan Conway for Barron’s.
Conway also notes sector allocations in low vol ETFs made the fund vulnerable to “the midyear interest-rate scare.” SPLV is nearly 45% allocated to rate-sensitive utilities and staples stocks while staples, utilities and telecom stocks combine for about 28% of USMV’s weight.
To be fair to SPLV and USMV, both have generated positive returns this year and the composition of these funds would indicate the potential for laggard status in overt bull markets. Additionally, both ETFs have been inflow positive in 2013, confirming investors still have some appetite for damping volatility in their portfolios. [Low Volatility ETFs Remain Popular With Risk-Averse Investors]
And it should be noted that SPLV and USMV are far from the only popular ETFs that have been stung by rising rates. Several marquee dividend and REIT ETFs have also been hit by rising rates and in the case of REIT ETFs, some have generated negative returns since Treasury yields spiked starting the in the second quarter.
Also noteworthy is the fact that the dividend ETFs that have lagged since rates started rising also have large weights to rate-sensitive sectors and, in some cases, are several times larger than SPLV and USMV. [As Rates Rise, Some Dividend ETFs Stand Tall]
There are options for investors looking for returns in excess of what low vol funds have provided. For example, the PowerShares S&P 500 High Beta Portolio (SPHB) has beaten the S&P 500 this year by almost 600 basis points.
Low volatility has not been a total wash this year. At the very least, the PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV) and the iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV) have been less bad than traditional, non-volatility emerging markets ETFs.
PowerShares S&P 500 High Beta Portolio
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.