ETF Trends
ETF Trends

With risk appetite high, low volatility exchange traded funds have recently taken some flak for lagging their traditional broad market peers.

That criticism, a familiar refrain as low volatility funds have become increasingly popular with investors, often focuses on the performance of “low vol” ETFs in short time frames. Over the long haul, ETFs that emphasize a volatility damping approach have often offered superior risk-adjusted returns. [Relax With Low Vol ETFs]

The SPDR Russell 2000 Low Volatility ETF (NYSEArca: SMLV) is an example of that phenomenon. SMLV, which is 26 months old, tracks the Russell 2000 Low Volatility Index, which is comprised of small-cap stocks with the least volatility over the last 252 trading days. The ETF is currently home to 231 stocks, or more than 10% the number of holdings in the iShares Russell 2000 ETF (NYSEArca: IWM). IWM is the largest U.S. small-cap ETF.

The Russell 2000 Low Volatility Index, SMLV’s underlying benchmark, “has outperformed the Russell 2000 Index for the one and five year periods ended April 14, 2015, just slightly underperforming for the three year period. In addition, the Index has exhibited comparatively lower volatility, as measured by annualized standard deviation of returns, and higher risk-adjusted return, as measured by Sharpe ratio, for all three time periods,” according to a research note published today by Russell Investments.

Breaking that down for the ETFs, SMLV is up 11.1% over the past year, an advantage of 160 basis points over IWM. Earlier this year, State Street (NYSE: STT) slashed SMLV’s annual expense ratio by more than half to 0.12% from 0.25%. [Big Fee Cuts From State Street]

“Historical performance for the U.S. small cap market as measured by the Russell Indexes helps illustrate how low volatility indexes may be an effective complement to market cap-based indexes and can provide additional market insight for long-term investors,” said Rolf Agather, managing director of research and innovation with Russell Indexes. “While low volatility indexes tend to underperform their parent indexes in periods of strong market advances, in periods of volatility and over the longer term, they have historically helped to moderate some of the peaks and valleys relative to their parent indexes.”

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