As investors continue to seek ways to diminish the effects of volatility on their investment portfolios, low-volatility and dividend focused exchange traded funds have both attracted greater attention.
“I’d [say]there are some similarities between high dividend strategies and low volatility strategies, but they are focused on different things,” said Jeremy Schwartz, the director of research at WisdomTree, at the recent Morningstar ETF Invest Conference.
“The low volatility obviously has a sort of the market on beta or volatility, and they are really focused on that return stream, whereas a dividend yield focus is really focusing on the valuation characteristics. So, it’s more about, what price are you paying to access those securities. So, there is this difference between returns versus valuation focus,” he added.
So far this year, low-volatility ETFs have brought in $3 billion in assets. Leading the charge is the popular PowerShares S&P 500 Low Volatility ETF (NYSEArca: SPLV), which has garnered about $2.5 billion in assets. [Why Investors Have Funneled $3 Billion to Low-Volatility ETFs]
“Some note that over the past 50 years, the market’s least-volatile stocks have performed about as well as the market, but with considerably less risk,” according to Morningstar analyst Robert Goldsborough. “The likeliest explanation for this market inefficiency — which has persisted both in developed and emerging markets — is leverage aversion; investors seeking above-market returns typically buy volatile stocks to do so (instead of utilizing leverage). This has the effect of whacking those risk-seeking investors with lower risk-adjusted returns.” [Low-Volatility ETFs: ‘Boring is Beautiful’]
Low-volatility ETFs, like SPLV, specifically screen for stocks that have exhibited relatively low levels of volatility, compared to the rest of the market. However, investors will notice that during extended bull markets, the least-volatile stocks will not perform as well as riskier picks.
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).