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Vanguard Mulls Low-Volatility ETFs as Category Thrives


Low-volatility ETFs have pulled in nearly $4 billion of new investor cash this year and now Vanguard is considering joining the party.

“We’re having a hard look at it, honestly. If you can minimize the volatility in some of these portfolios, especially in (investors’) retirement years when they’re drawing (their nest eggs) down, that could make a difference,” incoming Vanguard chief investment officer Tim Buckley tells Morningstar.

“That could make a big difference. So, I’d say more to come on that,” Buckley said.

Vanguard is the third-largest U.S. ETF provider but saw the highest inflows of any firm during the first three quarters with $42.4 billion, according to industry data.

With the dot-com bust and subprime meltdown still fresh in the minds of many investors and advisors, low-volatility ETFs almost sell themselves. The funds appeal to investors who want equity exposure but with a strategy that tries to limit downside risk. Volatility is a measure of a stock’s tendency to jump around in price.

PowerShares S&P 500 Low Volatility (SPLV) is the oldest and largest ETF in the category with $2.7 billion in assets The tracking index consists of the 100 stocks from the S&P 500 with the lowest realized volatility over the past year.

SPLV has been extremely popular in 2012 with net inflows of $1.7 billion, according to IndexUniverse data.

Also, these three low-volatility ETFs have each seen over $500 move in the door: iShares MSCI All Country World Minimum Volatility (ACWV), iShares MSCI USA Minimum Volatility (USMV) and iShares MSCI Emerging Markets Minimum Volatility (EEMV).

Other international ETFs in this segment include PowerShares S&P International Developed Low Volatility (IDLV) and PowerShares S&P Emerging Markets Low Volatility (EELV). [Low-Volatility ETFs Help Cushion Downside Risk]

An added bonus of this category is that low-volatility stocks have historically delivered exceptional risk-adjusted returns.

“Investors of all stripes can benefit from less-volatile stocks thanks to a puzzling phenomenon: Over the past 50 years, the least-volatile stocks have performed about as well as the market, but with far less risk. Low-volatility stocks have outperformed in most international stock markets studied, too,” says Morningstar ETF analyst Samuel Lee.

Invesco PowerShares is trying to capitalize on the demand for low-volatility and dividend ETFs by combining the two hot trends in the new PowerShares S&P 500 High Dividend Portfolio (SPHD). [Low-Volatility, High-Dividend ETF Has Great Sales Hook]

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.