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Weakness in Defensive Utilities Drags on Low-Volatility ETFs


Cautious investors have been piling into low-volatility exchange traded funds to hedge against potential bumps down the road. However, low-volatility options with a heavy tilt toward defensive utilities have experienced outflows recently.

The PowerShares S&P 500 Low Volatility Portfolio (SPLV) saw $654.6 million in outflows over May, according to IndexUniverse. The ETF is down 3.3% over the past month, whereas the S&P 500 Index gained 1.9%.

SPLV tracks a basket of 100 stocks from the S&P 500 Index that shows the lowest realized volatility over the past 12 months. Consequently, the fund has a large weighting in defensive sector utilities at 29.6%. Utilities were one of the worst performing sectors in May, with the Utilities Select Sector SPDR (XLU) down 7.7% over the past month.

In comparison, the iShares MSCI USA Minimum Volatility ETF (USMV) performed slightly better than the SPLV, dipping 2.1% over the past month, and attracted $62.3 million in assets over May. The better performance may be attributed to the fund’s smaller allocation toward utilities. [iShares: No, It’s Not A Minimum-Volatility ETF Bubble]

USMV requires “stock weights within 0.05% to 1.5% of the portfolio, sector weightings within 5% of the market-weighted index, and a one-way turnover of 10%,” writes ETF strategist Samuel Lee for Morningstar.

Low-volatility ETFs have been a popular strategy as they provide exposure to investments with attractive risk-adjusted returns. [Low-Volatility ETFs Remain Popular with Risk-Averse Investors]

“In nearly every market studied, low-volatility stocks have greatly outperformed high-volatility stocks on a risk-adjusted basis, a finding at odds with many investors’ notions of risk and return,” Lee said.

For more information on low-volatility funds, visit our low-volatility category.

Max Chen contributed to this article.

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.