PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) is the largest and oldest low-volatility ETF but a rival fund managed by BlackRock’s iShares is actually the category’s best seller in 2013.

SPLV has gathered net inflows of $781 million year to date compared with $1.43 billion for iShares MSCI USA Minimum Volatility (NYSEArca: USMV), according to ETF flow data from IndexUniverse.

Low-volatility ETFs have been immensely popular with investors who want stock-market exposure with some downside protection built in. The funds participate in the market’s upside although they will lag in frothy rallies. Still, low-volatility ETFs appeal to skittish investors who have been burned by a pair of jarring bear markets since 2000. Also, financial advisors are using low-volatility strategies to ease clients into equities.

“From conversations with several fund sponsors in recent weeks, it seems clear that many such firms are looking to add products in this [low-volatility] space,” says Nicholas Colas, ConvergEx Group chief market strategist. “’Min Vol’ is max-hot.”

In the first two months of 2013, the 34 low or minimum volatility exchange traded products gathered on average $926 million in new assets each month, more than double what was added to them a year earlier, according to S&P Capital IQ.

“In this group are ETFs that offer exposure to U.S. markets, international markets and emerging markets. Most of the ETFs are from iShares and PowerShares, although in February 2013, State Street Global Advisors launched two low volatility products tied to domestic Russell indices,” S&P notes.

According to academic studies, low-volatility stocks outperform the market over longer periods, and with stellar risk-adjusted returns. The phenomenon is seen as an anomaly in modern financial theory, but low-volatility strategies have been popular with large institutional investors in recent years.

A tale of two low-volatility ETFs: PowerShares vs. iShares

SPLV and USMV are the two largest low-volatility ETFs with assets of $4.2 billion and $2.3 billion, respectively. Both focus on U.S. stocks. [Low-Volatility ETFs Still Hot Despite Collapsing VIX]

However, the ETFs’ stock and sector allocations are different because their tracking benchmarks don’t take the same approach to building a portfolio of low-volatility stocks.

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