Plenty of exchange traded funds have names that imply high levels of similarities between two or more funds, but as has been previously noted, investors need to do more due diligence.
That is certainly the case with low volatility ETFs. At first glance, it would appear that the PowerShares S&P 500 Low Volatility Portfolio (SPLV) and the iShares MSCI USA Minimum Volatility ETF (USMV) are almost twins. Further examination shows these two giants of the low volatility ETF space are more akin to second cousins than twin brothers. [Loving Low Volatility ETFs]
Differences and nuances between the two ETFs are integral in the decision-making process for investors and explain why SPLV and USMV do not move in perfect lockstep with each other. Both ETFs lagged the S&P 500 last year in what was an overt bull market for U.S., but USMV outperformed SPLV due in large part to the former’s health care exposure. [Low Vol ETFs Take Some Hits]
As of Feb. 3, health care accounts for 18.6% of USMV’s weight, 800 basis points more than SPLV allocates to the same sector. Fast-forward to 2014 and SPLV has the advantage over USMV and the S&P 500 and it is thanks to one sector: Utilities.
With the health care sector coming under some pressure in recent days, utilities is now the only S&P 500 sector higher on the year. SPLV’s 25.2% weight to utilities stocks has helped the ETF be less bad than USMV and the S&P 500 to start 2014. SPLV’s weight to that sector is triple that of USMV’s.
“So depending on which specific sectors within the U.S. equity market that the investor favors and wants specific exposure to, these will likely be deciding factors in terms of selecting between the two funds,” said Street One Financial regarding SPLV and USMV in November 2013.
The utility of utilities, which could easily be strained if Treasury yields race higher again, has been seen with other ETFs this year. For example, dividend ETFs with significant allocations to utilities stocks have outpaced some dividend funds without much exposure to that sector. [Utilities Help Some Dividend ETFs]
Take the example of the PowerShares S&P 500 High Dividend Portfolio (SPHD) . SPHD marries a high yield strategy with a low volatility strategy similar to SPLV’s, giving the fund an almost 26% weight to utilities stocks. SPHD has been less bad than SPLV, USMV and the S&P 500 this year.
PowerShares S&P 500 Low Volatility Portfolio