ETFs that utilize low-volatility strategies have surged in popularity this year with risk-averse investors seeking out conservative approaches and safety.
“Recent market attention on low-volatility equity investing may seem to be a flavor-of-the-month theme to match risk-averse times, but the history of this approach dates to the 1970s,” says Nicholas Colas, ConvergEx Group chief market strategist.
“The ‘Low Volatility Anomaly’ posits that stocks with lower than sleepy stocks with less price movement outperform their riskier peers. This goes directly contrary to the bedrock belief that risk and return are tied at the hip,” he wrote in a note this week. “There’s a raft of new exchange traded funds on offer to provide exposure to low-vol stocks, and money managers and consultants are pushing the idea as well.”
PowerShares S&P 500 Low Volatility ETF (NYSEArca: SPLV) is the largest and oldest ETF in the category. It was launched in May 2011 and holds assets of $2.5 billion.
Over the past 50 years, the market’s least-volatile stocks have performed about as well as the market, but with considerably less risk, says ETF analyst Robert Goldsborough. [Low-Volatility ETFs: ‘Boring is Beautiful’]
SPLV has gathered $1.5 billion so far this year.
Low-volatility ETFs fit very well with current market psychology with investors frustrated after being burned by the dot-com bust and the more recent subprime meltdown.