Exchange traded funds have increasingly granted investors access to two prominent themes: Volatility reduction and properly positioning a portfolio for changes in interest rates.
The newly minted PowerShares ex- Rate Sensitive Low Volatility Portfolio (NYSEArca: XRLV) marries those two themes. XRLV, which debuted Thursday, tracks the S&P 500 Low Volatility Rate Response Index. The Index is composed of the 100 constituents of S&P 500 Index that exhibit both low volatility and low interest rate risk,” according to PowerShares.
One way of looking at XRLV is that the ETF is comparable to the wildly popular PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) with the interest rate protection kicker. SPLV, which is nearly four years old and home to $5.24 billion in assets under management, tracks the 100 S&P 500 members with the lowest trailing 12-month volatility.
However, it can be argued that SPLV is sensitive to interest rates because of the ETF’s combined 31.1% weight to consumer staples and utilities names. SPLV combats that potentially negative interest rate sensitivity with an almost 37% weight to financial services stocks. [Sector Impact for a Low Vol ETF]
Highlighting its usefulness as hedge against rising rates, XRLV features no utilities exposure while consumer staples check in at 10.6%. Like SPLV, XRLV features a healthy financial services weight (nearly 36%). What is notable about XRLV is that roughly 25 of its financial services holdings are either insurance providers or regional banks, the very sub-sectors of the financial services group that usually perform well when rates rise. [Rising Yields Lift Insurance ETFs]
Speaking of XRLV’s exposure to sectors that have the potential to outperform when rates rise, industrial and technology names combine for over 28% of the new ETF’s weight. As late cycle plays, those sectors have track records of durability in rising rate environments.
The technology, industrial and materials companies are among cyclical sectors that typically strengthen in a rising rate environment as investors turn away from safer assets and shift into riskier areas of the market. Materials stocks account for almost 7.4% of XRLV’s weight. XRLV charges 0.25% per year.
XRLV Sector Weights
Chart Courtesy: PowerShares
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.