When it comes to low volatility exchange traded funds, the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) are the undisputed heavyweights.
A combined assets under management tally of almost $10 billion for SPLV and USMV says as much, but as has been previously noted, these two low volatility ETFs arrived at rock star status in different ways.
“PowerShares and iShares have the most established product lineups tied to a low-volatility approach, with offerings focused on U.S., developed international, and emerging market equities. However, what’s inside these ETFs can be quite different. In the U.S., PowerShares holds the least volatile stocks that are inside the broader S&P 500 index, regardless of the sector exposure,” said S&P Capital IQ in a new research note.
As ETF Trends recently reported, SPLV, which some investors previously thought was a utilities ETF in disguise, now features a scant weight of just 2.6% to utilities stocks. That is good for the ETF’s second-smallest sector weight. On the other hand, financial services stocks are 35.4% of the ETF’s weight. [Low Vol ETF Pares Utilities Weight]
That does not mean utilities are suddenly see a surge in volatility. Despite rising Treasury yields, utilities sector volatility is only slightly above long-term averages. Rather, declining volatility for the financial services sector in the years since the financial crisis has allowed the S&P 500 Low Volatility Index, SPLV’s underlying benchmark, to increase exposure to that sector. [Why This ETF’s Utilities Weight is so Small]
“Meanwhile, iShares, working with an MSCI benchmark, uses sector bands (+/- 500 basis points relative to a parent MSCI index at rebalance). We think that enables the ETF to have more diversification. The two index providers also rebalance at different frequencies; S&P Dow Jones does so every three months while MSCI does so every six months. As such, the turnover rate for the PowerShares ETF is more than twice that of the iShares ETF and more resembles an actively managed mutual fund though with a 0.25% expense ratio, it is much cheaper,” according to S&P Capital IQ.
USMV’s current financial services weight is than half SPLV’s weight to that sector, but the iShares offering has utilities allocation that is nearly triple that of its PowerShares rival. Another significant difference is technology exposure. USMV’s weight to that group is over 15% while SPLV devotes just 4.2% to tech stocks.
“Both ETFs have favorably low S&P Capital IQ risk considerations, aided by holdings that have above-average S&P Capital IQ Quality Rankings and investment-grade Standard & Poor’s Credit Ratings. Using more modern portfolio theory risk statistics, USMV has a lower three-year standard deviation (7.9 vs. 8.7), while SPLV has a lower beta (0.75 vs. 0.79) relative to the S&P 500 index,” said S&P Capital IQ.
The research firm rates both ETFs overweight.
PowerShares S&P 500 Low Volatility Portfolio