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Low-Volatility ETFs are ‘The New Black’


Investors are buying ETFs that follow specialized low-volatility benchmarks at a much faster pace so far this year as they hunt for funds that provide exposure to stocks but with less risk.

“’Min Vol’ strategies are ‘the new black’ for many in the industry – products which hold their relevance through a market cycle,” ConvergEx Group market strategists said in a note Tuesday.

“While there are many quantitative methods to dampen portfolio volatility, the two most widely used among ETF sponsors are dividend-focused funds and those products that choose investments based on historical price volatility,” they said. [Low-Volatility ETFs Under the Microscope]

Dividend ETFs have pulled in close to $4 billion so far in 2013, compared with $9 billion of inflows the entire past year.

Meanwhile, funds which focus on stocks with less price volatility have gathered $1.5 billion year to date as compared to the $4.6 billion in new capital over the past year, according to ConvergEx.

ETFs in the latter category include PowerShares S&P 500 Low Volatility Portfolio (SPLV) and iShares MSCI Emerging Markets Minimum Volatility Index (EEMV). [Low-Volatility ETFs for Emerging Markets]

SPLV is the largest low-volatility ETF by assets with about $3.7 billion. The tracking index consists of the 100 stocks from the S&P 500 with the lowest realized volatility over the past 12 months. Volatility measures the tendency of a security to fluctuate in price.

Two new ETFs, PowerShares S&P MidCap Low Volatility (XMLV) and PowerShares S&P SmallCap Low Volatility Portfolio (XSLV), began trading last week. [PowerShares to List Small- and Mid-Cap Low-Volatility ETFs]

“In several conversations with ETF sponsors over the last year about Min Vol products, it has become clear … that the industry views these products as highly relevant for both retail and institutional investors,” the ConvergEx analysts said. “They are essentially a cross-over offering, with appeal for equity-heavy portfolios anxious to reduce risk in the fourth year of a rally as well as bond investors who need to add equity exposure.”

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.