While large-cap U.S. equities bounced back this summer, the SPDR S&P 500 ETF (SPY) was still down 11% for the year. However, lower-volatility equity ETFs have held up much better in 2022, incurring significantly narrower losses. These ETFs have gained traction with advisors and end clients who prefer to take a more risk-conscious approach. Though there are many ETFs with low volatility or min vol in the name, two funds garner the most attention: the Invesco S&P 500 Low Volatility ETF (SPLV) and the iShares MSCI USA Min Vol Factor ETF (USMV). These ETFs sound similar but are built differently.
The $12 billion SPLV owns the least volatile stocks in the S&P 500 regardless of sector representation and rebalances on a quarterly basis. With the late August rebalance of its underlying index, SPLV remained overweighted to traditionally defensive sectors compared to SPY, but there were notable shifts.
For example, positions were added to the utilities (28% of the current SPLV portfolio vs. 3% of SPY’s) and healthcare (14% vs. 14%) sectors, while positions were removed from consumer staples (20% vs. 7%) and real estate (8% vs. 3%). Meanwhile, exposure to some of the more cyclical sectors such as consumer discretionary (3% vs. 12%) and information technology (3% vs. 28%) remained underexposed. Top holdings included DTE Energy, Duke Energy, Johnson & Johnson, and PepsiCo.
USMV takes a more sector-diversified approach than SPLV to provide exposure to U.S. stocks that have historically been less volatile than the broader market. The $28 billion ETF looks more like SPY at the sector level, with 23% of assets in information technology, 18% in healthcare, 12% in consumer staples, and 8% in utilities, though it incurs some sector-constrained tilts. USMV is rebalanced semi-annually, with the next set of portfolio changes slated for November. Top positions include Cisco Systems, McDonalds, Texas Instruments, and Vertex Pharmaceuticals.
Sector Exposure of Lower Volatility ETFs vs. S&P 500 Based One (% of assets)
While both ETFs have outperformed SPY in 2022, the more defensively oriented SPLV has held up better, as its 2.8% year-to-date decline through August 25 was narrower than USMV’s 6.7% loss. Advisors and investors have also favored SPLV this year with the smart beta ETF gathering $3.2 billion, including nearly $900 million in the past month. The net inflows in 2022 have nearly recouped the $3.7 billion of net outflows that SPLV incurred in 2020 and 2021 combined.
In contrast, USMV pulled in $845 million in 2022, with $135 million of net inflows in the past month. Sentiment has improved for USMV, which incurred $12 billion of net outflows in the prior two calendar years.
Invesco and iShares have built a suite of ETFs that use a similar approach as SPLV and USMV but provide exposure to other investment styles, such the Invesco S&P MidCap Low Volatility ETF (XMLV) and the iShares MSCI EAFE Min Vol Factor ETF (EFAV).
Other asset managers offer U.S. large-cap equity exposure with a lower-volatility approach through products such as the Fidelity Low Volatility Factor (FDLO) and the SPDR SSGA US Large Cap Low Volatility Index ETF (LGLV). These ETFs have held up better than the broader equity market but performed differently than larger peers.
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