Investors Step Back From a Low Volatility ETF

With market volatility nearly non-existent this year and with investors displaying a preference for higher beta sectors, some low volatility exchange traded funds are seeing investors depart for less conservative destinations.

This year, investors have drifted away from once popular low volatility ETFs such as the and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV), but the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) has added new assets. USMV selects stocks based on variances and correlations while SPLV holds the 100 S&P 500 stocks with the lowest trailing 12-month volatility.

One of the primary issues currently facing low volatility ETFs such as SPLV and USMV is that U.S. stocks continue moving higher, encouraging some investors to chase performance. Low volatility strategies typically do not capture all of a bull market’s upside, but these funds often see less downside when markets slide.

“Generally, this is what investors should expect. Low-volatility portfolios tend to offer above-average downside protection in exchange for below-average upside participation. Over the long term, this should translate to better risk-adjusted (not absolute) returns for investors in low-volatility stocks,” according to Morningstar.