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A Low Volatility ETF With A Twist

A Low Volatility ETF With A Twist

Investors are hearing plenty about the increasing popularity of low volatility exchange traded funds this year thanks in large part to the impressive inflows to ETFs such as the iShares Edge MSCI Min Vol USA ETF (NYSE: USMV) and the PowerShares S&P 500 Low Volatility Portfolio (NYSE: SPLV).

While SPLV and USMV garner most of the attention heaped upon low volatility ETFs, other funds in this space are not only capturing assets but proving their mettle as well. Some even offer unique twists on traditional low volatility investing.

The PowerShares S&P 500 ex- Rate Sensitive Low Volatility Portfolio (NYSE: XRLV) is such an ETF. Home to nearly $132 million in assets under management, XRLV, which debuted in April 2015, is S&P Capital IQ's focus ETF for June. The research firm rates XRLV overweight, S&P Capital IQ highest rating.

XRLV follows the S&P 500 Low Volatility Rate Response Index, which is “composed of the 100 constituents of S&P 500 Index that exhibit both low volatility and low interest rate risk,” according to PowerShares.

A simple way of looking at XRLV is that it is the interest rate response solution to SPLV. So while it is not surprising SPLV features large weights to the consumer staples and utilities sectors, XRLV, as an ETF aiming to avoid punishment by higher rates, features no exposure to utilities stocks. XRLV's 14.6 weight to staples names is merely the ETF's fourth-largest sector allocation.

“From an S&P Global Market Intelligence ranking perspective, XRLV earns a neutral input for the qualitative valuation assessment of its holdings, but positive inputs for the credit ratings and the quality ranking - based on the earnings and dividend record -- of its positions. Constituents Coca-Cola Co. (NYSE: KO), PepsiCo Inc. (NYSE: PEP) and Torchmark (NYSE: TMK) all have above-average S&P Global Market Intelligence Quality Rankings of A,” said S&P Capital IQ.

Like SPLV, XLRV holds 100 stocks. None of the latter's holdings account for more than 1.3 percent of the ETF's weight. Industrials are XRLV's largest sector weight at 25 percent followed by healthcare and financial services, each of which account for more than 18 percent of the fund's weight.

If the Fed does indeed raise interest rates in June or perhaps July, certain high-dividend-yielding securities, such as electric utilities or household product companies, could be negatively impacted if history is any guide. Like SPLV, XRLV tracks an S&P Dow Jones index of 100 low volatility stocks, but the latter index excludes stocks that have historically performed poorly in rising rate environments,” adds S&P Capital IQ.


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Posted-In: Analyst Color Long Ideas Broad U.S. Equity ETFs Specialty ETFs Analyst Ratings Trading Ideas ETFs

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