While the low-volatility exchange traded funds may underperform in isolated periods, the strategy can provide a more conservative long-term play with a more attractive risk-adjusted return profile.
Based on the recent 30-day volatility readings, volatility in the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV), which tracks the 100 least volatile stocks on the S&P 500, has been higher each day since February 27, peaking on March 18, reports David Wilson for Bloomberg.
“There’s no guarantee that the name of an ETF, the label, means it’s going to perform the way it’s advertised,” Michael Rawson, an ETF analyst at Morningstar Inc., told Bloomberg. “Investors need to know there’s no magic formula.”
Consequently, investors should dive deeper into the ETFs to get a better handle of what they are investing into. For instance, SPLV does not include energy stocks, which have been rebounding lately.
Additionally, SPLV includes large positions in financials, utilities and consumer staples, which make up 68% of the fund’s portfolio, whereas the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) only includes a 38% tilt toward the three sectors. [Surprises in Low Volatility ETFs]
Due to the ETF’s sector weights, performance and volatility may vary over the short-term, especially with utilities currently underperforming the overall market. Nevertheless, the low-volatility strategy has provided investors exposure to smaller swings and better risk-adjusted returns over the longer term.