Low-Volatility ETFs: Wait For Full Market Cycle?

March 12th at 10:08am by John Spence

A low-volatility ETF has grown to nearly $1.4 billion in under a year with inflows driven by nervous investors looking for conservative strategies to tiptoe back into the stock market.

After suffering through the dot-com bust and the 2008 financial crisis within the span of a decade, investors are drawn to the idea of funds that attempt to limit losses.

“The true test of low-volatility strategies will be how they perform over a full market cycle or longer,” writes Rudy Luukko, editor at Morningstar Canada, in a column for the Toronto Star.

“For conservative investors, this seems to be a sensible strategy for seeking market returns that at or close to that of the benchmark index, and with a considerably smoother ride,” he said. [What You Need to Know About Low-Volatility ETFs]

PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) listed in May 2011 and has grown to over $1 billion in assets. As Luukko notes, investors and advisors will be watching how low-volatility ETFs perform over the longer term. [Sizing Up a Low-Volatility ETF]

SPLV launched in the spring before the August melt-down, and provided investors some protection by outperforming the S&P 500 in the second half of 2011. However, the ETF is trailing the S&P 500 this year, gaining 2.4% compared with a 9.5%  return for the stock index, according to Morningstar.

“No strategy works all the time. Low-volatility ETFs are likely to underperform when cyclical industries such as energy and base metals are booming, or when market sentiment as a whole is very bullish,” Luukko said. “With stocks around the world posting strong gains in the first two months of this year, it hasn’t been a favorable environment for a low-volatility strategy … They also tend to favor defensive industries like consumer staples.”

Other ETFs in the category include MSCI USA Minimum Volatility Fund (NYSEArca: USMV) and Russell 100 Low Volatility ETF (NYSEArca: LVOL). [Ups and Downs of Low-Volatility ETFs]

PowerShares S&P 500 Low Volatility Portfolio


The opinions and forecasts expressed herein are solely those of John Spence, 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.

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