Low-Volatility ETFs: ‘Boring is Beautiful’

September 25th 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

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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