Low-Volatility ETF Sees Huge Inflow

June 21st, 2012 at 10:32am by Paul Weisbruch, Street One Financial

We typically look for interesting developments in the ETF world in terms of uncovered, unrecognized products, or compelling ETF options trading trends or even just money flows that are out of the ordinary in this column.

In the past two sessions, a relative newcomer to the ETF space has suddenly garnered a ton of institutional assets, and in short order: iShares MSCI USA Minimum Volatility Fund (NYSEArca: USMV).

The fund, which debuted just last October of 2011, has suddenly grown to nearly a $200 million ETF after Tuesday’s trading session where more than 3 million shares exchanged hands. Typically, this ETF only averages approximately 113,000 shares traded per day. The activity itself is not terribly stunning simply because we observed and pointed out in the recent past, an institutional appetite for “Low Volatility” ETFs.

We believe that most portfolio managers are having a hard time looking past last summer’s steep sell-off, and although they likely want to be “invested” in equities to some degree, they also have scarred memories of the carnage that occurred from August to October of last year, and a strategy that provides a lower beta to the “market” itself, is quite appealing these days. [How to Use Low-Volatility Funds]

Thus, another entry in this “Low Vol” or “Low Beta” category is PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV), which has become quite a successful fund in terms of attracting assets, and in a considerably short amount of time. The ETF launched in May of 2011, and it has already raised about $2 billion in assets under management. In fact, we point out that the same day that USMV caught our attention in terms of increased trading volume, SPLV also traded several million shares, a huge multiple of the typical daily trading volume.

While we have not seen any evidence (yet) or either redemption nor creation activity in SPLV, one from the outside looking in could hypothesize that an institutional manager or managers are potentially swapping from SPLV into USMV. USMV does in fact charge only 15 bps from an expense ratio standpoint whereas SPLV carries a charge of 25 bps. That said, we re-emphasize that we are not completely certain if these were “swaps” from one ETF to the other. The more important questions for most portfolio managers will likely be “How and why are these two products different, and how do they stack up against each other head to head?”

Year to date, USMV has notably out-performed SPLV, rallying 7.75% versus 5.32%. Since inception, USMV still has displayed relative out-performance, as the ETF is up 13.52% versus SPLV rising 10.83%. SPLV tracks an S&P index methodology, that selects the 100 stocks in the S&P 500 Index that display the lowest realized volatility over the past 12 month period.

Conversely, USMV tracks a custom MSCI Index that is meant to include both Large and Mid Cap equities that have demonstrated lowest absolute risk in terms of beta and volatility measures. This said, the two funds are not exactly “apples to apples” given the mid cap exposure inherent in USMV, but since they can both be broadly characterized as “Low Vol” funds, it is worth keeping both on your radar for potential usage in similar circumstances.

iShares MSCI USA Minimum Volatility Fund

For more information on Street One ETF research and ETF trade execution/liquidity services, contact pweisbruch@streetonefinancial.com.