Learning to Love Low Vol ETFs…Again

In what was buoyant market environment in 2013, low volatility exchange traded funds, not surprisingly, lagged the S&P 500.

When animal spirits are high, ETFs heavy on consumer staples, health care and utilities names have the potential to trail the broader market. That was the case last year for the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV), but a downbeat start to 2014 for U.S. stocks could mean it is time for investors to fall in love with the likes of SPLV all over again. [Loving Low Vol ETFs]

SPLV and USMV both offer low volatility access to U.S. equities, but these ETFs are far from being identical twins.

PowerShares uses an S&P Dow Jones Index that holds the least volatile stocks that are inside broader index, regardless of the sector exposure. Meanwhile, iShares, working with an MSCI benchmark, uses sector and country bands when constructing its minimum volatility product, which enables the ETF to have more diversification,” said S&P Capital IQ in a new research note. [Key Differences Between Low Volatility ETFs]

SPLV and USMV have outperformed/been less bad than the S&P 500 this year, but a slight advantage goes to SPLV. SPLV has benefited from its almost 25% weight to the utilities sector. That was a drag on the ETF last year, but a selling point this year as the utilities group is the S&P 500’s top-performing sector to this point.

S&P Capital IQ rates SPLV marketweight and USMV overweight. “While past performance is not indicative of future results and should not be the sole driver of ETF selection in our opinion, we think looking at how these two different approaches has worked in recent years is enlightening. In addition, we encourage an understanding of where the sector/country representation of each ETF,” said S&P Capital IQ in the note.

S&P Capital IQ also highlighted the utility of low volatility ETFs for investors hunting for international exposure. The iShares MSCI EAFE ETF (NYSEArca: EFA) is off 3.3% this year, but the iShares MSCI EAFE Minimum Volatility ETF (NYSEArca: EFAV) is lower by 2.6%. The U.K., Japan and Switzerland combine for about 64% of EFAV’s weight compared to roughly 51% in EFA.