Are Low Volatility ETFs Topping Out?

09/16/2014 10:15 am EST

Focus: ETFS

Thomas Aspray

, Professional Trader & Analyst

Since low volatility ETFs were designed to hold up better in down markets, last week's decline was somewhat of a surprise and MoneyShow's Tom Aspray wonders whether their charts are sending an important message.

The Dow Industrials and Dow Utilities managed slight gains Monday while the selling was the heaviest in the Nasdaq and small-caps. The market internals were solidly negative with the declining stocks leading the decliners by a 2-1 margin on the NYSE.  The NYSE Advance/Decline Line has dropped further below its WMA after confirming the recent highs.

Most of the focus remains on the bond market and the dollar as yields are holding just below their recent highs. In line with the recent dumping of junk bond ETFs, the 10-Year T-Note yield has risen sharply. They are just below the strong resistance in the 2.625%-2.660% so short-term pullback in yields would not be surprising. The December Dollar Index has been trading above its weekly starc+ band for the past three weeks and is therefore also in a high risk buy area.

In my weekend ETF review, I noted that most of the low volatility ETFs had a rough week.  This class of ETFs was designed to hold up better in down markets and allow investors to sleep better when a market is correcting. Of course, investors must be willing to accept lower returns than a benchmark like the S&P 500 when the market is strong.

Each of these three low volatility ETFs has a different focus but their charts may be sending an important message.

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Chart Analysis: The PowerShares S&P 500 Low Volatility (SPLV) has assets of $4.59 billion with an expense ratio of 0.25%. It has a current yield of 2.40%.

  • SPLV was up 23% in 2013 including dividends, compared with the 32% gain in the S&P 500.
  • It holds the 100 stocks in the S&P 500 with the lowest realized volatility over the past twelve months.
  • The weekly chart shows that the ETF failed to surpass the July high at $32.73 in early September.
  • The strong reversal last week is consistent with a top, with the quarterly pivot at $34.70.
  • The weekly starc- band is now at $37.00.
  • The longer-term downtrend in the RS line is consistent with its underperformance versus the S&P 500.
  • In a bear market, you would expect it to show positive RS analysis.
  • The heavy volume in July dropped the weekly OBV below support at line c.

The daily chart of PowerShares S&P 500 Low Volatility (SPLV) also shows a top formation, as it formed lower highs in early September, line d.

  • The daily starc- band is now being tested.
  • The key support on the daily charts, line e, is now in the $34 area.
  • There is short-term resistance at $35.08 with stronger at $35.50.
  • The daily RS analysis shows some signs of bottoming, line g.
  • A move through its downtrend, line f, would be the first sign that it was becoming a market leader.
  • The daily chart more clearly shows the volume spike of over 14 million shares on July 21.

NEXT PAGE: 2 More ETFs to Watch

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The iShares MSCI EAFE Minimum Volatility (EFAV) has $1.24 billion in assets with an expense ratio of 0.20% and a yield of 3.28%. It is focused on the lower beta and volatility stocks across 22 developed countries, excluding the US and Canada.

  • It has 15% in the top ten holdings with Novartis AG and the Hang Seng Bank, Ltd. the top holdings at just over 1.5%.
  • The weekly chart shows that EFAV completed a triangle formation, lines a and b, in April.
  • EFAV is currently up 5.6% YTD and is testing the quarterly pivot at $63.71.
  • The monthly projected pivot support is at $63.08 along with the weekly starc- band and the breakout level (line a).
  • The weekly RS made a new low last week and is in a well-established downtrend, line c.
  • The volume has increased recently as the weekly on-balance volume (OBV) has dropped below its WMA and support at line d.
  • The next support is at the long-term uptrend, line e.
  • The 20-day EMA is at $64.67 with the monthly pivot at $64.91.

The iShares MSCI Emerging Markets Minimum Volatility (EEMV) selects its holdings from the MSCI Emerging Markets Index. It has a yield of 2.47% with an expense ratio of 0.25%.

  • It has over 200 holdings with just over 15% in the top ten holdings.
  • It is up 6.43% YTD and the weekly chart shows that it just triggered a LCD sell signal on Friday.
  • The monthly projected pivot support at $61.07 is now being tested.
  • There is further support in the $60-$60.50 area with the quarterly pivot at $58.91.
  • The sideways action in the relative performance, line g, suggests it is keeping pace recently with the S&P 500.
  • The weekly OBV broke its downtrend, line h, in early May.
  • The OBV is still holding above its WMA.
  • The declining 20-day EMA is now at $62.38 with further resistance at $63.00.

What it Means: The weakness in these low volatility ETFs could be interpreted in several ways. Does it mean that those who bought these more cautious ETFs are moving into more aggressive instruments, which could be a positive sign?

Alternatively, are these more risk adverse investors just getting out of the market altogether?

Too early to tell, but of the three, iShares MSCI EAFE Minimum Volatility (EFAV) looks the best.

How to Profit: No new recommendation.

On September 23, I will be giving a Webinar on FX trading techniques. If you would like to join me sign up here.

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