However, SPLV has managed to again be less volatile than the S&P 500 this year with financial services as its top sector weight. SPLV’s weight to financials is over 37%, more than double the ETF’s weight to consumer staples and nearly triple its weight to utilities. [Surprises in Low Volatility ETFs]
Knowing that SPLV’s holdings are selected based on trailing 12-month volatility, it is not unreasonable to surmise that over that period, utilities were more volatile than financials and staples, SPLV’s two largest sector weights. That is anecdotal, but it underscores the importance of the sector effect on SPLV’s ability to deliver on the promise of reduced volatility.
“However, strategic sector tilts don’t paint the complete picture here. If we only apply the returns of the S&P 500 sectors to the respective sector weights in S&P 500 Low Volatility Index over the last 24 years, the “hypothetical” low volatility portfolio can account for 69% of the total risk reduction. This means that being in the “correct” sector during this period accounted for more than two-thirds of the volatility reduction achieved by the S&P 500 Low Volatility Index,” according to S&P Dow Jones Indices.
PowerShares S&P 500 Low Volatility Portfolio
