An Overview of Low-Volatility ETFs
August 6th 2012 at 8:13am by Tom Lydon
Low-volatility exchange traded funds have given investors good risk-adjusted returns over the past year. Some investors are using these ETFs as core holdings, but it’s important to understand how they work and the differences between the competing products.
“Why have low-volatility stocks posted such great risk-adjusted returns? The best explanation is leverage aversion. Investors who target above-market returns may be unwilling or unable to use leverage to reach their expected-return targets,” Samuel Lee wrote on Morningstar. [Using Low-Volatility ETFs to Endure Market Swings]
They are baskets of U.S. stocks that have typically exhibited low volatility. The ETFs have outperformed the broader indices in risk-off environments.
The popularity of low-volatility ETFs has led to the launch of various tools from several providers. The largest ETF is the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) with $2.3 billion in assets. The ETF is one of the most successful recent fund launches, and has been trading since May 2011. SPLV is up 11.3% since the launch, reports the ETF Professor on Benzinga. [The Most Popular New ETFs]
Some other low-volatility ETFs include:
- iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEArca: EEMV): For those investors that want overseas exposure with risk-adjusted returns, this ETF is the answer. Low-volatility stocks have outperformed on a risk-adjusted basis in most international stock markets studied. [ETF Performance: A Selective Approach to Emerging Markets]
- iShares MSCI USA Minimum Volatility Index Fund (NYSEArca: USMV): This ETF launched in October of last year and has $350.1 million in assets. The fund is up 10.6% since its launch. [Low Volatility ETFs to Protect Against Market Gyrations]
- Russell Developed ex-US Low Volatility ETF (NYSEArca: XLVO): This ETF gives developed market exposure without the U.S. Germany and the Netherlands are the only countries from Europe represented, giving investors a convienient play as the Eurozone debt crisis rages on. The ETF is up 5.7% year-to-date.
- Russell 1000 Low Volatility ETF (NYSEArca: LVOL): Consumer staples and utilities account for the top holdings in this portfolio. There is no company or holding that account for more than 2.2% of LVOL’s portfolio. There is about $67.1 million in assets under management in this ETF.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.