Low volatility exchange traded funds are still popular with investors as highlighted by over $1 billion in combined inflows to the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) this year.

SPLV and USMV, the two largest low volatility ETFs, now have over $10 billion in combined assets under management. However, low volatility ETFs, particularly SPLV, have some sector-level surprises investors should be aware of.

“Like a wedding guest list that starts off small then balloons to include second cousins twice removed, low volatility products currently include sector allocations that may surprise investors,” said Axioma’s Dr. Anthony Renshaw in a recent research note. “Traditionally, low volatility products have had substantial allocations to the utilities and consumer staples sectors—sectors with long histories of “unexciting” returns. However, since mid-2012, a typical low volatility portfolio has allocated less and less to utilities and consumer staples and more and more to financials, a sector with a very different set of expectations.”

Less than two months shy of its fourth birthday, SPLV has often been criticized as a utilities ETF in disguise. However, that criticism has ignored a plain truth about the ETF: That it is not married to the utilities sector in any fashion. Rather, SPLV’s 100 holdings are culled from the S&P 500 stocks with the lowest trailing 12-month volatility. [Low Volatility ETFs Delivering Again]

Said another way, if utilities experience a surge volatility, their weight in SPLV will decline. As of March 20, consumer staples and utilities stocks combined for less than 31% of SPLV’s weight, or less than the ETF’s 37.2% allocation to the financial services sector. SPLV currently does not feature a utilities stock among its top 10 holdings. [Low Vol ETFs Rise to the Occasion]

“Part of this trend is explained by recent events. Since June 2014, oil prices have plummeted, increasing volatility for oil-sensitive utility equities, which has likely caused some utility stocks to become too volatile for low volatility products,” according to Axioma.

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