Chilling Out With Low Volatility ETFs

The PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and theiShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) are up to their old tricks again and for volatility-conscious investors, that is a good thing.

Amid a turbulent start to 2015 for U.S. equities, SPLV and USMV are again outperforming the S&P 500. This year’s outperformance by low volatility ETFs comes after SPLV and USMV returned 17.3% and 16.3%, respectively in 2014, good for an average gain of 16.8% and well ahead of the 13.5% returned by the S&P 500.

Low volatility ETFs are do lack for critics, most of which predictably assert that funds such as SPLV and USMV are bound to lag conventional benchmarks during overt bull markets. That was the case in 2013, but the assertion also misses a key point in the debate: Whether low volatility are delivering on stated objectives.

“So far, low-volatility ETFs have delivered on their promise to provide a smoother ride in a low-cost, convenient package. 

SPLV and USMV are both less volatile than the markets they track. Without going into wonky volatility statistics, they’re both about 15 percent less volatile than the S&P 500. They’ve also returned about the same as the S&P 500: In the past two years, USMV and SPLV are both up 60 percent, compared with 62 percent for the S&P 500,” reports Eric Balchunas for Bloomberg.

SPLV and USMV go about their business in different ways. SPLV is no longer the utilities-heavy ETF investors once perceived it to be. Financials account for over a third of the ETF’s sector weight, more than double USMV’s weight to the same sector. [Low Vol ETFs Delivering Again]

Utilities and consumer staples combine for nearly 35% of SPLV’s weight, but those sectors represent just 22.7% of USMV’s weight. Conversely, USMV allocates 19.6% of its weight to health care stocks, roughly two and a half times the weight to that group found in SPLV.