ETF Spotlight: Low-Volatility Funds
January 17th at 3:18pm by John Spence
Exchange traded funds hitched to low-volatility indexes continue to be a popular trend in 2012 as more providers roll out ETFs with conservative equity strategies.
However, investors need to do their homework and research the ETFs’ tracking indexes because different approaches can affect risk and performance.
Last week, Invesco PowerShares listed two international low-volatility ETFs in an effort to follow up on the success of PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV). Launched in May 2011, the fund has already gathered $1 billion in assets. [PowerShares Adds International Low-Volatility ETFs]
Other ETF firms such as BlackRock and Russell have also launched funds that zero in on stocks with lower volatility. [BlackRock Lists Four Low-Volatility ETFs]
Other choices in the space include Russell 100 Low Volatility ETF (NYSEArca: LVOL) and iShares MSCI USA Minimum Volatility Index Fund (NYSEArca: USMV).
Taking into account the European debt crisis and uncertainty over the global economy, “we believe investors continue to look for ways to generate excess returns while reducing their risk profiles,” says Todd Rosenbluth, S&P Capital IQ ETF analyst.
Within the S&P 500, the least-volatile sectors are consumer staples, utilities and healthcare.
“Besides historically incurring less risk, these sectors also tend to provide investors with above-average dividend yields,” wrote in a note Tuesday. “But for some investors, there is a preference to have a more diversified investment strategy, and through low volatility ETFs they can achieve exposure to multiple sectors at a relatively modest cost.”
Sector allocations are a good starting point when researching low-volatility ETFs.
PowerShares S&P 500 Low Volatility Portfolio has 33% in utilities, 29% in consumer staples and 11% in healthcare.
Russell 100 Low Volatility ETF has 28% in consumer staples, 14% in healthcare and 13% in utilities to round out the top sector allocations, according to Rosenbluth.
Meanwhile, iShares MSCI USA Minmum Volatility Index Fund invests 17% in the healthcare sector, 16% in consumer staples, 14% in information technology and only 9% in utilities.
Although all three ETFs are branded as low-volatility ETFs, the varying sector bets mean their performance can diverge in different markets.
PowerShares S&P 500 Low Volatility Portfolio
