Conservative investors who want to limit risk in their portfolios are taking a look at low-volatility ETFs. They need to understand how these funds will perform in various market climates and be aware of their concentration in certain sectors.
“I wouldn’t recommend anyone engage in this strategy because the [back-tested] returns have been higher in the past,” Craig Lazzara, senior director at S&P Indices, said in a Bloomberg story.
“In a year where the market is doing really badly, it’s highly likely you’ll be down much less,” he said in the report. “You’ll get sufficient participation on the upside but a reduced amount.” [ETF Spotlight: Low-Volatility Funds]
The largest of these new funds is the $1.3 billion PowerShares S&P Low Volatility Portfolio (NYSEArca: SPLV), which has an expense ratio of 0.25%.
The ETF gives investors “the flexibility to reduce risk in flat or bear markets by adding low volatility strategies to their portfolios,” said Ben Fulton, Invesco PowerShares managing director of global ETFs. [Sizing Up a Low-Volatility ETF]
Some financial advisors are using low-volatility ETFs to manage risk in clients’ portfolios.
“In the period we’re in now, the marginal dollars going into stocks are coming from bond investors,” Doug Sandler at RiverFront Investment Group said in the Bloomberg article. “That investor doesn’t care about beating the S&P 500. He cares about keeping his risks down.”
Investors also need to be mindful of the sector concentration in low-volatility ETFs. For example, PowerShares S&P Low Volatility Portfolio has 30% in utilities and 29.5% in consumer staples. [Chart of the Day: Low Volatility ETF]
Other choices in the category include Russell 100 Low Volatility ETF (NYSEArca: LVOL) and iShares MSCI USA Minimum Volatility Index Fund (NYSEArca: USMV).