Time to Invest in Low Volatility ETFs?
With 2012 nearing its end, investors are becoming very concerned about the fiscal cliff. ETFs of almost all segments of the market are witnessing modest sell-offs as investors remain concerned about the consequences of going over the ledge, pushing many to steer clear of risky investments and settle for safer havens instead.
If President Obama and Congress fail to work out a plan to prevent the country from falling off the dreaded fiscal cliff, which seems very likely at this point, then the U.S. economy may slip into yet another recession.
With markets expected to be volatile due to this uncertainty, investors who want to stay invested should avoid high volatile products and instead shift their asset base to low volatile products. These products have proved their effectiveness when markets tend to be facing a wall of worry (4 Low-Volatility ETFs to Hedge Your Portfolio).
Investors who invest in low volatility products at times of an uncertain market can make profits above their higher volatility peers. Low volatility ETFs tend to diminish risk and generate decent returns for investors, while higher beta stocks face more severe losses.
However, when markets tend to be bullish, investors generally opt for high beta stocks to attain above-average gains. At this time, high beta stocks beat the low volatility stocks which tend to underperform.
Low volatility ETFs generally include those stocks in their portfolio which have shown more stability in the past and have experienced the least in movement. In 2012, when markets stayed uncertain, low volatility ETFs managed to collect more than $3 billion. (Three Low Volatility ETFs for Stormy Markets).
Markets may turn out to be weak heading into 2013 and investing in a low volatility stock may prove to be a safe bet for investors. But instead of investing in a single low volatility stock, one can put in their money in multiple stocks wrapped in an ETF for even lower risk exposure.
For these investors, we have highlighted a handful of the low volatility ETF options that are currently available and which could provide great exposure to investors in this rocky market environment:
PowerShares S&P 500 Low Volatility (SPLV)
SPLV tracks the S&P 500 Low Volatility Index. The index is comprised of 100 stocks from the S&P 500 Index with the lowest realized volatility over the past 12 months (Four Easy Ways to Play Beta and Volatility with ETFs).
SPLV seems to be very popular among investors. Since its launch in May, the fund could manage to amass an asset base of nearly $3 billion. The fund invests its asset base in a basket of 100 stocks which exhibit low volatility.
The fund is not biased in its individual holdings, however, among sectors the fund is highly dependent on the performance of consumer staples and utility with total allocation of more than 55% in these two sectors. The fund charges a fee of 25 basis points annually and has returned 6.1% over a period of one year.
iShares MSCI USA Min Volatility (USMV)
Another fund which was launched in 2011 is iShares MSCI USA Min Volatility (USMV). Since its inception the fund garnered an asset base of $0.7 billion. This fund provides exposure to a larger basket of stocks than SPLV and is home to 125 securities in total.
Unlike SPLV, the fund’s exposure is not limited to consumer staples and utilities. Instead the fund assigns double-digit allocations to health care, consumer staples, financials and information technology sectors.
The fund also has an edge in expenses charging a fee of just 15 basis points annually while generating a 30-day SEC yield of 2.65% in the process. The fund delivered a return of 8.0% since inception (Inside the Two ETFs up More Than 140 YTD).
iShares MSCI All Country World Minimum Volatility Index Fund (ACWV)
ACWV shares its launch date with USMV with the difference that its exposure is not limited to U.S. equities but spread across world market, low volatility equities. Since its inception the fund could manage to build an asset base of $651.1 million and provides exposure to 278 low volatility stocks (Leveraged ETFs and Volatility: A Powerful Mix).
Although the ETF has been designed to provide exposure to low volatility stocks of many countries, the U.S. accounts for 50.6% of the asset base. Apart from this, Japan is the only country with a double-digit allocation.
Financials, consumer staples, health care and consumer discretionary get a double-digit allocation in the fund. The fund charges a fee of 35 basis points while delivering a return of 8.1% over the past year.
iShares MSCI Emerging Market Minimum Volatility Index (EEMV)
EEMV is the most popular ETF in the emerging market space providing exposure to low volatility stocks. Investors can tap the growth of the emerging markets by investing in a portfolio of 211 low volatility stocks.
EEMV manages an asset base of $787.2 million and charges a fee of 25 basis points annually, comparable to SPLV which is considered king of low volatility ETFs in the domestic space.
Among sector exposures, financials which is regarded as the most volatile sector in the developing markets is the top priority of the fund with an allocation of 26.3%. Apart from this, the fund has double-digit allocations in consumer staples and consumer discretionary.
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Read the analyst report on SPLV
Read the analyst report on USMV
Read the analyst report on ACWV
Read the analyst report on EEMV
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Read the analyst report on SPLV, USMV, ACWV, EEMV
