Looking at the ETFs, investors have to be aware of the subtle differences between varying products. USMV factors in how stocks interact with one another, weights each sector within 5 percentage points of the parent index and leans toward stocks that generate relatively stable earnings and are less sensitive to the business cycle than the broader market. SPVL, on the other hand, picks out the 100 least volatile stocks from the S&P 500.
While low-volatility stocks can help cushion a position in a prolonged market downturn, the strategy can miss out on short-term moves. For instance, SPLV has only gained 1.5% over the past month, whereas the S&P 500 has increased 3.7% – this is party due to the recent underperformance in the utilities sector, which has dipped 0.3% over the past month.
Furthermore, the conservative tilt hinders low-volatility ETF gains in a cyclical, bullish rally. In 2013, the S&P 500 returned over 32.4% while SPLV rose 23.3% and USMV gained 25%.
“Because the fund’s holdings have relatively stable earnings and are less sensitive to the business cycle than the average stock in the S&P 500 Index, they should hold up better than their peers during market downturns,” according to Morningstar analyst Michael Rawson. “However, they will also likely underperform during bull markets.”
For more information on low-volatility strategies, visit our low-volatility category.