Low-Volatility ETFs: Wait For Full Market Cycle?
March 12th, 2012 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.”
PowerShares S&P 500 Low Volatility Portfolio
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