The Definitive Guide to Low Volatility ETFs
Until 2011, investors seeking refuge from topsy-turvy markets were forced to turn to known entities. Those being cash, high-grade government and corporate bonds and sectors such as consumer staples and utilities.
These days, there are more low volatility choices than for investors to embrace and these new "low vol" plays come courtesy of the ETF world. Simply put, the number of ETFs advertised as low volatility funds has exploded since last year.
As a group, low volatility ETFs have had mixed success in terms of attracting assets under management. Some have thrived (one even topping the $2 billion AUM mark) while others have toiled in anonymity.
Regardless of an ETF's popularity or obscurity, investors should do a little homework before running into any volatility fund. The Definitive Guide to Low Volatility ETFs is here to help.
PowerShares S&P 500 Low Volatility Portfolio (NYSE: SPLV) The PowerShares S&P 500 Low Volatility Portfolio is not that old (it debuted in May 2011), but the fund has quickly become the dominant name among low volatility ETFs. As of August 3, SPLV had almost $2.4 billion in assets under management.
More important than size is the fact that SPLV is doing its job and that is providing investors with a credible alternative to a traditional S&P 500 index ETF. In the past year, SPLV has outperformed the SPDR S&P 500 (NYSE: SPY) by 400 basis points. That type of performance differential mitigates the impact of SPLV's 0.25 percent expense ratio, which is by no means high, it is just high compared to funds like SPY.
SPLV is currently home to 98 stocks, though the fund can hold up to 100 stocks from the S&P 500 Index with the lowest realized volatility over the past 12 months according to PowerShares. Not surprisingly, utilities and consumer staples combine for 60 percent of SPLV's sector weight.
PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSE: EELV) PowerShares did not rest on its laurels with SPLV. In an effort to duplicate that success in the emerging markets universe, the fourth-largest U.S. ETF sponsor introduced the PowerShares S&P Emerging Markets Low Volatility Portfolio in January.
EELV was not the first ETF to bring the low volatility/emerging markets combination to investors and that might explain why the fund has just $10.8 million in AUM. However, that small AUM total belies some important and positive facts about EELV. First, the fund is relatively inexpensive compared to other emerging markets ETFs with an expense ratio of just 0.29 percent. Second, EEMLV has gained 10.4 percent since its debut. That compares quite favorably with a gain of less than three percent for the iShares MSCI Emerging Markets Index Fund (NYSE: EEM).
Malaysia and South Africa combine for over 47 percent of EELV's country weight. Taiwan is the only other nation to receive a double-digit allocation.
PowerShares S&P International Developed Low Volatility Portfolio (NYSE: IDLV) The PowerShares S&P International Developed Low Volatility Portfolio also debuted in January and this fund has also struggled to attract assets. As of August 3, IDLV had just $8.1 million in AUM. However, as is the case with IDLV's emerging markets counterpart, EDLV, the AUM number belies IDLV's ability to generate alpha for investors.
Since its debut, IDLV has surged 9.2 percent and that is with a 43 percent allocation to beaten down Japanese equities. Arguably, IDLV's performance indicates the fund is a valid option for investors looking for exposure to Japan without committing to a Japan-specific fund. With an allocation of 16.4 percent, Canada is the only other country to receive a double-digit weight in IDLV.
Other country weights include Singapore, New Zealand, the U.K. and Australia. IDLV also features a reasonable expense ratio of 0.25 percent.
HILO's lack of popularity does not mean that it is not a fine ETF. The fund has been a solid performer this year and an index yield of almost 5.4 percent helps mute the impact of a pricy 0.85 percent expense ratio. "Additional risk criteria correlated to the MSCI Emerging Market Index limits concentration in any position to 5 percent and country exposure to a maximum of 5 positions," according to EGShares.
Brazil, South Africa, China and Malaysia are HILO's top country weights and the ETF pays homage to the typical low volatility sectors as telecom and utilities combine for almost 52 percent of the fund's weight.
iShares MSCI USA Minimum Volatility Index Fund (NYSE: USMV) Given SPLV's success, it is only logical that the fund would attract a couple of competitors. One of those rivals is the sometimes forgotten iShares MSCI USA Minimum Volatility Index Fund.
USMV came to market in October 2011 and now has $374.4 million in AUM. The iShares offering also boasts a paltry 0.15 percent expense ratio and a year-to-date gain of 10.5 percent. Home to almost 120 stocks, USMV's sector weightings are a little different than other low volatility ETFs. Translation: USMV is not excessively weighted to staples and utilities names.
Healthcare, staples, technology and consumer discretionary all receive double-digit weights in USMV while utilities are merely the fund's sixth-largest sector weight with an allocation of 8.6 percent.
iShares MSCI All Country World Minimum Volatility Index Fund (NYSE: ACWV) The iShares MSCI All Country World Minimum Volatility Index Fund, which shares the same inception date as USMV, has proven to be even more popular than its U.S.-focused counterpart. With a sizable roster of 264 stocks, USMV has raked an impressive $453.2 million in AUM, making it one of the more successful new ETFs of the past year.
While ACWV paints itself as an all country play, the U.S. accounts for 53 percent of this fund's weight. With a concentration of nearly 13 percent, Japan is the only country to receive a double-digit weight.
ACWV proves the low volatility theme works as the fund has outpaced the iShares MSCI ACWI Index Index Fund (NASDAQ: ACWI) by nearly 200 basis points this year. Staples, health care, financials and consumer discretionary are ACWV's top-four country weights. Utilities come in sixth with a weight of 8.7 percent.
iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSE: EEMV) Just as SPLV is the king of low volatility ETFs with a domestic focus, EEMV can lay claim to being the king low volatility emerging markets funds.
Not only has EEMV outpaced the rival EELV and HILO by significant margins this year, but this $298.7 million fund has also left the iShares MSCI Emerging Markets Index Fund and the Vanguard MSCI Emerging Markets ETF (NYSE: VWO) in its wake. What makes EEMV's year-to-date performance all the more impressive is that the fund allocates almost 25 percent of its weight to financials, a volatile sector in developed and developing markets alike.
Consumer staples and telecom names combine for another 26.5 percent of EEMV's weight. The fund's country weights are predictable in that Taiwan and South Korea, arguably the two most conservative emerging markets, are two of the fund's three largest country allocations. EEMV has an annual expense ratio of 0.25 percent.
iShares MSCI EAFE Minimum Volatility Index Fund (NYSE: EFAV) Just as EEMV is the "low vol" equivalent of one of the largest ETFs of any kind, in that case EEM, the iShares MSCI EAFE Minimum Volatility Index Fund has a traditional counterpart. The iShares MSCI EAFE Index Fund (NYSE: EFA) with $34.6 billion in AUM is also one of the 10 largest ETFs by assets on the market today.
By comparison, EFAV is small with just $73 million in AUM, but EFAV is 14 basis points cheaper than EFA. The former also keeps up a familiar trend: Low volatility funds outpacing their non-volatility counterparts in 2012. Year-to-date, EFAV has topped EFA by almost 240 basis points.
The U.K. and Japan dominate EFAV's country lineup, combing for over 55 percent of the fund's weight. Five sectors – financials, staples, health care, industrials and telecom – receive double-digit weights in the fund.
Russell Dev ex-U.S. Low Volatility ETF (NYSE: XLVO) Just nine months old, the Russell Developed ex-U.S. Low Volatility ETF is worthy of a place in the low volatility ETF conversation. Minus fees and expenses, XLVO's 30-day SEC yield was a fair of 3.19 percent as of June 30, according to Russell data.
XLVO is a bit more diverse at the country level than its developed world rivals on this list. Five countries – the U.K., Canada, Japan, Australia and Switzerland and receive double-digit weights. Be advised that XLVO does have some Eurozone exposure as Germany, France and the Netherlands combine for over 13 percent of XLVO's weight.
The $5.1 million ETF, which charges 0.25 percent per year, was home to 316 stocks as of July 31. XLVO's top-10 holdings represent just 20.1 percent of the fund's overall weight.
Russell 2000 Low Volatility ETF (NYSE: SLVY) There are multiple low volatility ETFs devoted to large cap U.S. stocks, developed world ex-U.S. stocks and emerging markets equities. However, the Russell 2000 Low Volatility ETF is the lone low volatility ETF devoted exclusively to small-caps. SLVY's 171 constituents have an average market cap of $1.35 billion.
While volatility and beta are not the same thing, it is worth noting SLVY's beta against the Russell 3000 is 1.2. SLVY has $10 million in AUM and an annual expense ratio of 0.3 percent. To its credit, SLVY has slightly outperformed the iShares Russell 2000 Index Fund (NYSE: IWM).
Russell 1000 Low Volatility ETF (NYSE: LVOL) The Russell 1000 Low Volatility ETF is the largest of the Russell "low vol" lineup with almost $68.3 million in AUM. LVOL is typical of some of the other large-cap domestic funds highlighted here in that staples and utilities combine for over 38 percent of the fund's weight. Health care and producer durables also receive double-digit weights.
Home to 105 stocks, LVOL's top-10 holdings account for just 21.3 percent of the ETF's weight. That lineup includes familiar blue chips such as Dow components AT&T (NYSE: T), Coca-Cola (NYSE: KO), Kraft (NASDAQ: KFT) and Verizon (NYSE: VZ). LVOL charges just 0.2 percent per year and has a beta of 0.89 against the Russell 3000.
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