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Mid Caps Like The Low Volatility Treatment, Too

Mid Caps Like The Low Volatility Treatment, Too

Low volatility exchange-traded funds are getting plenty of attention this year, but the ETFs from this group commanding most of the headlines have distinctly large-cap feels, including the PowerShares S&P 500 Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (NYSE: SPLV)).

That is not surprising, as investors are often biased toward large caps; larger companies have historically displayed less volatility than their mid- and small-cap counterparts. So, 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.

Thinking Large Strategy For Mid-, Small-Cap ETFs

The PowerShares S&P MidCap Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (NYSE: XMLV)) proves as much. XMLV is essentially the mid-cap equivalent of the aforementioned SPLV. While SPLV holds the 100 S&P 500 stocks with the lowest trailing 12-month volatility, XMLV holds the 80 S&P MidCap 400 names with lowest volatility over the past year.

Related Link: Betting Against Hedge Funds On China Now Has A 23% Potential Payoff

XMLV proves the application of low volatility in a mid-cap wrapper is working. Year-to-date, the ETF is up 11.7 percent and has been hitting a series of all-time highs. XMLV is outpacing the S&P MidCap 400 by 270 basis points this year.

That is old hat for XMLV. The ETF debuted in February 2013 and has consistently topped traditional mid-cap ETFs since then. Over the past 36 months, XMLV has topped the S&P MidCap 400 by about 1,600 basis points.

But What About Growth?

Simply because XMLV is a low volatility ETF does not mean investors forsake growth in the name of playing defense. In fact, XMLV's 24.2 percent weight to mid-cap growth names is above its 21.6 percent allocation to mid-cap value stocks.

XMLV's mid-cap focus ensures some significant sector discrepancies relative to large-cap peers such as SPLV. For example, XMLV allocates nearly half its weight to the financial services sector, which is more than double SPLV's weight to that sector. By virtue of many consumer staples names dwelling in the large-cap universe, SPLV devotes over 21.6 percent to that group while staples are XMLV's smallest sector allocation at less than 1.4 percent.

XMLV's 15.4 percent utilities weight is almost on par with what investors from a low volatility ETF, but its healthcare weight is perhaps low at 3.7 percent.

Overall, investors are clearly enthusiastic about XMLV. Of the ETF's $456.5 million in assets under management, $291.8 million has flowed into the fund this year.


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