Low-volatility stock exchange traded funds are outpacing the benchmark S&P 500 index as conservative plays weathered the market correction in October and kept performing, but some warn of an overcrowded trade.
Year-to-date, the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) gained 17.3% and iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) rose 16.9%, whereas the S&P 500 index increased 14.3%. [ETFs to Capture the Low-Volatility Anomaly]
The low-volatility strategies underperformed last year as a steady bull rally propelled U.S. equities. However, a rise in volatility this year has helped the least volatile stocks standout this year.
Harindra de Silva of Analytic Investors argues that the low-volatility strategy will continue to do well if the CBOE Volatility Index moves toward the 20 level – the VIX currently sits at around 15, reports John Authers for Financial Times.
Additionally, de Silva argues that low-volatility equities are experiencing greater demand due to low interest rates. Traditionally, investors would turn to fixed-income assets to diminish risk exposure. However, with rates more likely to rise and the U.S. economy expected to continue expanding, investors have turned to low-volatile stock options to capture a growing equities market and to hedge some of the market risks.
For instance, both SPLV and USMV overweight outperforming defensive sector stocks. Specifically, SPLV includes a 18.1% tilt toward utilities and 16.6% in consumer staples. USMV has 19.6% healthcare and 14.5% consumer staples. Both ETFs also underweight the energy sector, the worst performing area of the market so far this year.