Barron’s had an interesting take on low volatility ETFs over the weekend in an article titled Time to Flee Low Vol ETF Strategy. The general tone of the article points to the PowerShares S&P 500 Low Volatility ETF (NYSEARCA: SPLV) and its reported 25% weighting to utilities. SPLV has always had a heavy weighting to utilities ranging from 31% to 18% as I’ve seen it.
Barron’s quotes well known portfolio manager Rod Smyth as saying that right now the strategy is dangerous.
A relatively broad based fund that allocates 20-30% in one sector is always taking the same risk. In the case of SPLV, the exposure to the utility sector makes in vulnerable to rising rates as played out a year ago. What was odd about the article is that they are positing the need to flee the strategy but only mentioned the one fund. There are many other funds in the low vol space many of which have different methodologies than SPLV which means they avoid that huge sector concentration.
Smyth recommended a dividend ETF from WisdomTree that he likes but coincidentally Jason Zweig had an article up at the WSJ whose title might as well have been Time to Flee Dividend ETF Strategy (the real title was No Free Lunch in Dividend Funds).
Zweig noted that after several years of outperforming, dividend funds in general lagged behind the cap-weighted S&P 500 by 400 basis points in 2013 and are lagging a little bit behind this year.
One crucial point is that there is no investment strategy that can be the best for all times. If Zweig’s info about outperforming earlier and then lagging in 2013 and so far in 2014 is accurate then at some point the dividend funds will go back to outperforming market cap indexes. This if of course true in every logical comparison (and I guess the illogical comparisons too) like foreign versus domestic, large versus small, growth versus value and so on.