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.