Market Overview

A Low Vol ETF Love Affair

A Low Vol ETF Love Affair

One of the most prominent themes in the world of exchange-traded funds this year is investors' love affair with low volatility strategies, including the iShares Edge MSCI Min Vol USA ETF (iShares Trust (NYSE: USMV)) and the PowerShares S&P 500 Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (NYSE: SPLV)).

In fact, low volatility ETFs, primarily aided by the assets pouring into USMV and SPLV, are among this year's most popular smart beta funds. A basic premise of low-volatility ETFs is that they should be less bad than their traditional rivals when markets sag — the rub being a fund such as SPLV will leave some returns on the table when equities soar. Living in the current market environment, SPLV and rival low-volatility ETFs are showing what they are made of.

Recent Performance

“The ten largest exchange traded funds that are focused solely on the least volatile equities pulled in $12.30 billion of new assets in the first half of 2016, according to Factset data, higher than the $8.76 billion raised in all of 2015. Demand for these products, at $1.46 billion in inflows in June, remained high amid investor concerns ahead of and after the Brexit vote,” said S&P Capital IQ in a note out Monday.

The success of low volatility ETFs this year is not confined to large-cap strategies, such as those offered by SPLV and USMV. Nor is it confined to U.S. borders.

Looking More Broadly

For example, the iShares Edge MSCI Min Vol USA ETF (iShares Inc. (NYSE: EEMV)) is providing investors with a solid alternative to traditional emerging markets ETFs. Additionally, the PowerShares S&P MidCap Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (NYSE: XMLV)) is thriving.

Related Link: Another Milestone For Bond ETFs

Working on the premise that low volatility works for bigger stocks and that mid and small caps are usually more volatile, it can be discerned that the application of a low volatility strategy outside the large-cap space can be rewarding. XMLV is proving as much as it is one of this year's best-performing mid-cap ETFs.

“XMLV gathered $349 million of new money in the first half of 2016. Approximately half of the fund’s assets are in financials stocks, with insurance companies Brown & Brown (BRO) and REITs such Weingarten Realty Investors (WRI) widely held; both stocks have above-average Quality Rankings of A-. Utilities and materials stocks are also well represented,” said S&P Capital IQ.

The research firm has Overweight ratings on SPLV, USMV and XMLV and a Market-Weight rating on EEMV.

“Despite different construction, USMV and SPLV have similarly low 0.72 and 0.73 three-year betas relative to the S&P 500 index; EEMV and XRLV have modest betas of 0.79 and 0.75, despite focusing on traditionally riskier emerging markets and mid-cap investment style,” added S&P Capital IQ.

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