Low-Volatility ETFs: ‘Boring is Beautiful’
September 25th 2012 at 8:13am by John Spence
Skittish investors looking for strategies that take a more cautious approach in the stock market have added more than $1 billion to low-volatility ETFs in the third quarter.
“Clearly, investors want reduced volatility, and there is a perception that a more conservative asset allocation has not adequately filled that role,” says Morningstar ETF analyst Robert Goldsborough. When it comes to low-volatility stocks, boring is beautiful to investors, he explains.
“Solid historical performance doesn’t hurt, either. Some note that over the past 50 years, the market’s least-volatile stocks have performed about as well as the market, but with considerably less risk,” the analyst wrote in a recent commentary.
ETFs in the category include PowerShares S&P 500 Low Volatility ETF (NYSEArca: SPLV), iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSEArca: EEMV), iShares MSCI All Country World Minimum Volatility Index Fund (NYSEArca: ACWV), iShares MSCI USA Minimum Volatility Index Fund (NYSEArca: USMV), PowerShares S&P International Developed Low Volatility (NYSEArca: IDLV), PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEArca: EELV), iShares MSCI EAFE Minimum Volatility Index Fund (NYSEArca: EFAV) and EGShares Low Volatility Emerging Markets Dividend ETF (NYSEArca: HILO). [Some Overlooked Low-Volatility ETFs]
SPLV is the largest and oldest low-volatility ETF. It was launched in May 2011 and holds assets of $2.5 billion.
SPLV has seen net inflows of $414.4 million in the third quarter, according to IndexUniverse data. The ETF has posted a total return of 24.8% for the year ended Sept. 24, compared with a 31.1% gain for the S&P 500. [What is Driving the Performance of Low-Volatility ETFs?]
“In an environment of ultralow interest rates, high market volatility, and consistent flows out of equities, investors have shown a steady interest in high-dividend-paying equities and low-volatility stocks,” says Goldsborough at Morningstar.
“A word of caution (which the current wave of low-volatility investors hopefully is taking into account): During extended bull markets, investors in the least-volatile stocks should be prepared for extended periods of potential underperformance,” he added.
PowerShares S&P 500 Low Volatility ETF
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