ETFs that utilize low-volatility strategies have surged in popularity this year with risk-averse investors seeking out conservative approaches and safety.
“Recent market attention on low-volatility equity investing may seem to be a flavor-of-the-month theme to match risk-averse times, but the history of this approach dates to the 1970s,” says Nicholas Colas, ConvergEx Group chief market strategist.
“The ‘Low Volatility Anomaly’ posits that stocks with lower than sleepy stocks with less price movement outperform their riskier peers. This goes directly contrary to the bedrock belief that risk and return are tied at the hip,” he wrote in a note this week. “There’s a raft of new exchange traded funds on offer to provide exposure to low-vol stocks, and money managers and consultants are pushing the idea as well.”
PowerShares S&P 500 Low Volatility ETF (NYSEArca: SPLV) is the largest and oldest ETF in the category. It was launched in May 2011 and holds assets of $2.5 billion.
Over the past 50 years, the market’s least-volatile stocks have performed about as well as the market, but with considerably less risk, says ETF analyst Robert Goldsborough. [Low-Volatility ETFs: ‘Boring is Beautiful’]
SPLV has gathered $1.5 billion so far this year.
Low-volatility ETFs fit very well with current market psychology with investors frustrated after being burned by the dot-com bust and the more recent subprime meltdown.
“So it should be no surprise that ‘Low volatility’ equity investing is very much the talk of the town at the moment. With interest rates as low as they are, investors are looking for reasonable alternatives to fixed income instruments that at current prices seem destined to deliver mediocre future returns. At the same time, the Financial Crisis and its related equity volatility have cast a long shadow,” Colas writes.
“What do you do if you want exposure to the stock market but are fearful of future volatility? You wade into the shallow end of the stock market pool, and one interpretation of that approach is to buy stocks with lower than average variations in their historical prices,” the strategist said. “You’re not trying to hit it out of the park with such a strategy – just to do better than bonds. There’s some intuitive logic to this approach so for many investors this is pretty much all they need to hear.”
Other low-vol ETFs include 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).
Low-vol ETFs have pulled in $3 billion year to date, according to ConvergEx.
“To be fair, that’s not big money considering the $135 billion of inflows for U.S. listed ETFs so far in 2012. Still, these products clearly have tapped a vein of investor interest,” Colas said.
PowerShares S&P 500 Low Volatility ETF