With U.S. stocks flailing and the S&P 500 officially in correction territory, investors looking to remain long equities or establish new bullish positions ought to consider the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV).
The two are home to a combined $10.5 billion in assets under management. Each ETF features surprisingly small utilities sector allocations as well as some significant sector-level differences. 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]
Consequently, investors should dive deeper into the ETFs to get a better handle of what they are investing into. For instance, SPLV does not include energy stocks, which have the worst performers in the S&P 500 this year.
SPLV shows a 3-year trailing standard deviation of 8.79 and a Sharpe Ratio of 1.67, while the S&P 500 has a 9.59 standard deviation and 1.61 Sharpe Ratio, according to Morningstar data. Additionally, USMV shows a 8.24 standard deviation and a 1.83 Sharpe Ratio. Standard deviation is a measure of dispersion from its mean, so a greater deviation reflects greater volatility. Additionally, the Sharpe Ratio is a measure of calculating the risk-adjusted return and a greater value typically reflects a more attractive risk-adjusted return. [Surprises in Low Volatility ETFs]