Typically, safe and boring equities picks come with reduced risk and limited potential returns, but low-volatility exchange traded funds, which have gained a robust following after the large market swings last year, are proving that a fund may perform even with a conservative approach.
For instance, since launching last May, the Powershares S&P 500 Low Volatility ETF (NYSEArca: SPLV) has gained 9.5%, compared to a 0.7% loss in the S&P 500 benchmark Index, reports Ian Salisbury for the Wall Street Journal. So far, the fund has attracted $1.6 billion in assets. [Sell in May: Stock ETFs Under the Gun]
Market researchers and academics point to the growing data that buying safe, well-established companies does not mean an investor needs to sacrifice long-term gains. The advocates contend that research indicates the least volatile stocks would have done as well or better than riskier picks.
“You get a win-win” by sticking with safer stocks, said Ben Fulton, head of ETFs at Invesco PowerShares, in the WSJ story.
Currently, there are 14 different “low-volatility” or “low-beta” ETFs on the market.
Still, critics are pointing out that the low-volatility ETFs’ lead in performance is dwindling as the markets move away from volatility. For instance, as the markets move toward stable growth and lower volatility, the low-volatility ETFs may begin to lag behind in the bull market rally.
“My premise is there’s a better opportunity in growth,” Tom Mench, an investment manager who oversees $180 million in ETF assets, said in the article.
Morningstar analyst Samuel Lee believes the ETFs’ phenomenal growth “was a lucky coincidence. If you had released these funds in the late 1990s, no one would have bought them.”
Powershares S&P 500 Low Volatility ETF
For more information on market volatility, visit our volatility category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.