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Low Volatility ETFs Take a Breather


Since bursting onto the scene just over two years ago, low volatility ETFs have been favored destinations for conservative investors looking to be long stocks without the heartburn often caused by high-growth, high-beta sectors.

Now about two and a half years old, the PowerShares S&P 500 Low Volatility Portfolio (SPLV) has $4.33 billion in assets under management. The rival iShares MSCI USA Minimum Volatility ETF (USMV), which celebrates its second birthday in a month, has already amassed $2.16 billion in AUM. However, those totals are lower than what was seen just a few weeks ago, perhaps indicating that although U.S. markets have been far from sanguine this summer, investors are stepping back from “low vol” ETFs. [Surveying Low Volatility ETFs]

Since the start of August, SPLV and USMV have shed a combined $332 million in assets, according to Index Universe data. Outflows from those lynchpins of the low volatility ETF corner have come even as investors have fretted about the situation in Syria, the downturn in emerging markets equities and the looming start of Federal Reserve tapering of quantitative easing. [Big Low Volatility ETF Trailing S&P 500 as Utilities Weigh]

“The fact that low-volatility funds had provided market-like returns in the past without any greater volatility is an anomaly that cannot be explained by the efficient markets hypothesis. As is the case with many anomalies, their discovery often leads to their disappearance. It certainly looks like the cash flows into these strategies changed their very nature,” wrote Larry Swedroe on CBS MoneyWatch.

In addition to the aforementioned factors, low volatility ETFs have been stung rising interest rates. Utilities and consumer staples stocks have languished as 10-year Treasury yields have jumped. Those sectors combine for 45% of SPLV’s weight and over 23% of USMV’s weight. Both ETFs currently have 30-day SEC yields well below the yield on 10-year Treasuries. [Utilities Weakness Drags on Low Volatility ETFs]

SPLV and USMV are not alone in seeing investors step back from the low volatility theme. The PowerShares S&P 500High Dividend Portfolio (SPHD) tracks the S&P 500 Low Volatility High Dividend Index. That means a focus on high yield, low volatility stocks and that means a combined 40% weight to utilities and staples.

SPHD, which like SPLV pays a monthly dividend, has lost $25.6 million in assets since the start of August.

This does not mean the low volatility theme is dead. It may just be shifting frontiers. Since August 1, the PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV) and the iShares MSCI Emerging Markets Minimum Volatility Portfolio (EEMV) have raked in over $96 million in new assets combined.

iShares MSCI USA Minimum Volatility ETF

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.