Turbulent Market Sending Investors to Low Vol ETFs

A broad view of the third-quarter performance turned in by U.S. stocks indicates stocks were lethargic at best, but drilling down a bit further reveals a spike in volatility in the back half of September that gave way to a monthly loss of 1.8% for the S&P 500.

September, often rarely a good month for stocks is over, but October is here and with the arrival of the tenth month of the year also comes one of the most volatile months for stocks. The upside of that is October also represents the last month in weakest sixth-month period in which to be long equities. [Best Sector ETFs for October]

A bumpy third-quarter ride for stocks combined with October’s reputation for elevated volatility has some investors turning to familiar friends: Low volatility exchange traded funds. Last month, investors added $147.4 million to the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV).

The $2.8 billion USMV evaluates the volatility of each individual holding (the ETF currently holds 154 stocks) and the correlations between stocks. The fund applies a number of constraints to ensure the portfolio is sufficiently diversified. [Advantages of Low Vol ETFs]

Proving their mettle last month, USMV and the rival PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) each outperformed the S&P 500 with SPLV losing less than 0.8%. Investors pulled $49.1 million from SPLV last month, but the ETF was an impressive third-quarter asset gatherer. In what may be a sign that investors are betting on a bumpy end to the year, investors allocated $460.1 million in new money to SPLV in the third quarter, the largest amount received by any PowerShares during the quarter, according to issuer data.

Though modest, inflows to international low volatility ETFs were also seen last month with the PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEArca: EELV) and the PowerShares S&P International Developed Low Volatility Portfolio (NYSEArca: IDLV) adding about $12 million combined.