S&P Eyes Low Volatility ETFs

08/03/2016 9:56 am EST


Todd Rosenbluth

Senior Director of ETF & Mutual Fund Research, CFRA Research

The 10 largest ETFs that are focused solely on the least volatile equities pulled in $12.3 billion of new assets in the first half of 2016 — higher than the $8.76 billion raised in all of 2015, according to Factset data, notes Todd Rosenbluth, S&P Global Director of ETF Research in The Outlook.

The appeal of these ETFs is that they allow equity market participation while providing lower beta, i.e., volatility.

In addition, in many cases the underlying holdings have modest risk considerations, according to S&P Global Market Intelligence.

Lastly, costs are relatively minimal: the expense ratios for the 10 low volatility ETFs with the most assets are all below 30 basis points.

PowerShares and iShares offer a broad suite of low volatility or minimum volatility ETFs, covering various regional and market-cap specific styles.

These ETFs include only stocks with the low standard deviations within a parent index, and they are rebalanced within the year at set dates to reflect changes in market performance.

iShares Edge MSCI Minimum Volatility (USMV) is the largest of these products, with $15.3 billion in assets, including $6.2 billion of net inflows in the first half of 2016.

The ETF holds the least volatile securities within the sector, but has sector bands that limit its overweighting or underweighting to the parent MSCI index to 500 basis points at the semi-annual rebalance. Financials (20% of assets) and health care (20%) are the largest sectors.

The second-largest volatility-reducing ETF is PowerShares S&P 500 Low Volatility (SPLV). As with USMV, net inflows of $1.2 billion in the first half of 2016 were much stronger than in all of 2015. SPLV is rebalanced on a quarterly basis.

Even as investors pulled $9.7 billion out of international equity ETFs in the first half of 2016, iShares Edge MSCI Emerging Markets Minimum Volatility (EEMV) attracted $916 million in new money.

EEMV has more of its assets in Malaysia and Thailand, with less exposure to China and Taiwan, than the market-cap weighted iShares MSCI Emerging Markets (EEM).

Demand for lower volatility products also includes mid-cap US securities. PowerShares S&P Mid-Cap Low Volatility (XMLV) gathered $349 million of new money in the first half of 2016.

Approximately half of its assets are in financials stocks. Utilities and materials stocks are well represented.

According to our research, some of the stocks inside the iShares and PowerShares products are fairly valued — but given the demand for equities with modest risk profiles, the appeal of these ETFs is not based on valuation alone.

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By Todd Rosenbluth, Global Director of ETF Research in The Outlook

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