In a year marked by wider market oscillations, investors are filling their core portfolio positions with low-volatility exchange traded fund strategies.
Investors have funneled over $5 billion into low-volatility ETFs globally over the first two months of the year, including a record $3.9 billion in February, reports Jackie Noblett for Ignites.
Low-vol ETF strategies continue to entice investors. So far in March, the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV), which selects low-volatile stocks based on variances and correlations along with other risk factors, saw $574.8 million in net inflows, according to ETF.com. The PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV), which simply tracks the 100 least volatile stocks taken out of the S&P 500, also saw $206.3 in inflows this month.
Fund sponsors attribute the sudden growth in low-vol strategies to retail investors and advisors shifting large chunks of their portfolios away from traditional cap-weighted stock ETFs. Instead, more investors have warmed up to low-vol ETFs that promise to diminish portfolio volatility through stocks that exhibit lower price swings.
The strategy has been working out so far this year as volatility depressed more growth-oriented stocks. Year-to-dated, USMV rose 3.5% and SPLV gained 3.1% while the S&P 500 Index dipped 0.4%.
Potential investors should be aware that since these low-vol ETFs focus more more slow and stable companies, the low volatility strategy may underperform more growth-oriented stocks if the markets turn around. However, sponsors and analysts argue that the money flowing into low-vol strategies could stick this time as investors look for long-term risk mitigation.
“If you are an individual and you know what you are doing or you are working with a financial advisor, it’s about how much risk can I endure and be comfortable, and low-vol and factor investments are just a tool that can really help with that risk management without having to use a more complex product,” Dan Draper, head of Invesco PowerShares, told Ignites.
[related_stories]More investors may be positioning for heightened volatility ahead. While market complacency has increased in recent weeks, with volatility dissipating and equities strengthening, some warn of rising risks ahead.
“Current low levels of volatility look unsustainable,” Richard Turnill, Managing Director and Global Chief Investment Strategist for BlackRock, said in a note, pointing out that U.S. equity market volatility is hovering around its lowest level since August 2015 and is well below its long-term average.
iShares MSCI USA Minimum Volatility ETF