In this week’s Macro Theme, we review our “Slowing Dragon” theme. We began discuss...
Low-Volatility ETFs: 'The New Black'
02/26/2013 9:00 am EST
John Spence and Tom Lydon of ETF Trends provide two disparate insights on the current trend toward low-volatility ETFs, and each discuss two new offerings they are watching.
Investors are buying ETFs that follow specialized low-volatility benchmarks at a much faster pace so far this year, as they hunt for funds that provide exposure to stocks but with less risk.
"'Min Vol’ strategies are ‘the new black’ for many in the industry—products which hold their relevance through a market cycle,” ConvergEx Group market strategists said in a note Tuesday. “While there are many quantitative methods to dampen portfolio volatility, the two most widely used among ETF sponsors are dividend-focused funds and those products that choose investments based on historical price volatility.”
Dividend ETFs have pulled in close to $4 billion so far in 2013, compared with $9 billion of inflows the entire past year. Meanwhile, funds that focus on stocks with less price volatility have gathered $1.5 billion year-to-date, as compared to the $4.6 billion in new capital over the past year, according to ConvergEx.
ETFs in the latter category include PowerShares S&P 500 Low Volatility Portfolio (SPLV) and iShares MSCI Emerging Markets Minimum Volatility Index (EEMV).
SPLV is the largest low-volatility ETF by assets, with about $3.7 billion. The tracking index consists of the 100 stocks from the S&P 500 with the lowest realized volatility over the past 12 months. Volatility measures the tendency of a security to fluctuate in price.
Two new ETFs, PowerShares S&P MidCap Low Volatility (XMLV) and PowerShares S&P SmallCap Low Volatility Portfolio (XSLV), also began trading recently.
“In several conversations with ETF sponsors over the last year about Min Vol products, it has become clear...that the industry views these products as highly relevant for both retail and institutional investors,” the ConvergEx analysts said. “They are essentially a crossover offering, with appeal for equity-heavy portfolios anxious to reduce risk in the fourth year of a rally, as well as bond investors who need to add equity exposure.”
State Street Global Advisors is the latest exchange traded fund provider to roll out low-volatility ETFs, which have been very popular with investors who want stock exposure with some downside cushion.
SMLV tries to reflect the performance of the Russell 2000 Low Volatility Index, which is comprised of small-cap stocks with the least volatility over the last 252 trading days. The fund has 170 holdings, and the largest holding makes up 2.11% of the overall portfolio. SMLV comes with a 0.25% expense ratio.
Sector allocations include financials, 31.2%; utilities, 16.4%; industrials, 15.5%; consumer discretionary, 10.2%; information technology, 9.7%; health care, 6.0%; consumer staples, 5.0%; materials, 4.3%; and energy, 1.8%.
LGLV tries to reflect the performance of the Russell 1000 Low Volatility Index, which holds large-cap stocks with the least volatility over the previous 252 trading days. The fund has 92 holdings, and the largest component is 2.4% of the portfolio. LGLV has a 0.2% expense ratio.
Sector allocations include consumer staples, 20.5%; health care, 16.1%; industrials, 13.8%; utilities, 12.8%; financials, 10.2%; consumer discretionary, 8.4%; information technology, 7.3%; energy, 5.8%; telecom services, 3.7%; and materials, 1.5%.
“Our new low volatility SPDR ETFs were developed in response to increasing demand from investors looking to improve the risk-adjusted returns of their portfolio, increase their equity allocation while maintaining downside protection, or tactically take a more defensive approach to the US large cap or small cap markets,” James Ross, global head of SPDR Exchange Traded Funds, said in a press release.
However, low-volatility Russell index ETFs did not grab investors’ attention last year. The Russell 1000 Low Volatility ETF (former ticker LVOL) and Russell 2000 Low Volatility ETF (former ticker SLVY) closed last October 24.
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