More Low Vol ETFs Your Broker Forgot to Mention
There is no denying that low volatility ETFs are becoming increasingly popular with investors. Just look at what this sub-sector of the ETF universe has been able to accomplish in less than years.
The king of the group is the PowerShares S&P 500 Low Volatility Portfolio (NYSE: SPLV), which has raked in almost $3.5 billion in assets. SPLV will not turn two years old until May.
On Wednesday, iShares announced its four-ETF suite of low volatility funds has topped a combined $4 billion in assets under management. That quartet of ETFs debuted in October 2011. The trend of robust inflows to low or minimum volatility ETFs is not just continuing. It is surging.
“This year through February 19, as the chart shows, min vol funds have attracted average monthly flows of close to $900 million. That is more than double the average monthly flows we saw in 2012 and far above 2011’s average monthly flows of less than $100 million,” according to a note by Dodd Kittsley, global head of ETP research at BlackRock (NYSE: BLK).
As is often the case with various corners of the ETF space, some “low vol” funds are gaining brand-name recognition, such as SPLV, while some still undiscovered. However, there are a few that fit into the latter category that investors should have a look at.
PowerShares S&P 500 High Dividend Portfolio (NYSE: SPHD)
Obviously, SPHD’s name indicates this is a dividend ETF, which it is and it is arguably one of the more compelling new income funds on the market.
However, SPHD’s underlying index tells investors this is low volatility play as well. The fund tracks the S&P 500 Low Volatility High Dividend Index, which tracks the 50 S&P 500 components with historically high dividend yields and low volatility. That combination could be alluring for investors that are looking for more in the way yield.
For example, SPHD has a 30-day SEC of over four percent. That easily exceeds that of many popular dividend ETFs that do not screen for low volatility names. Like SPLV, SPHD pays a monthly dividend and features large weights to utilities (over 23 percent) and consumer staples (over 13 percent). SPHD is up 7.7 percent year-to-date, outpacing the SPDR S&P 500 (NYSE: SPY) by about 40 basis points in the process.
iShares MSCI EAFE Minimum Volatility Index Fund (NYSE: EFAV)
The iShares MSCI EAFE Minimum Volatility Index Fund is the low volatility answer to the wildly popular ishares MSCI EAFE Index Fund (NYSE: EFA), one of the largest ETFs of any stripe. EFAV is not nearly as big as EFA, though with $287.6 million in AUM the latter is by no means small.
EFAV is cheaper than EFA with a an expense ratio of 0.2 percent compared to 0.34 percent for EFA, but the lower expenses come with some cost to investors as EFA has been the better performer since EFAV debuted in October.
Indicating that market environment plays an importance part in the returns accrued by low volatility ETFs, EFAV has sharply outpaced EFA this year as Eurozone fears have once again risen. EFAV’s sector weights give away the reasons for its out-performance of EFA this year.
EFAV’s weight to financials is 570 basis points less than EFA’s, but the former’s weight to consumer staples and health care names are each more than 500 basis points greater than the latter’s.
PowerShares S&P International Developed Low Volatility Portfolio (NYSE: IDLV)
For the moment, the PowerShares S&P International Developed Low Volatility Portfolio is one of those ETFs that fans of superficial metrics such as assets and volume love to hate. IDLV has just under $35 million in AUM and average daily volume of less than 16,900 shares.
IDLV features at least one surprise, that being a 25.8 percent weight to financial services stocks, a fairly large allocation to that sector among low volatility ETFs. Consumer staples follow with a weight of 21.8 percent. On the other hand, IDLV does temper volatility by featuring scant Eurozone exposure. For example, Germany and the Netherlands combine for less than 2.7 percent of the ETF’s weight.
At the country level, there are two other issues to consider with IDLV. First is a 38.5 percent weight to Japan. As that exposure is unhedged, IDLV could be somewhat vulnerable if the yen bounces back. Second, the ETF has an 11.7 percent weight to the U.K., which recently lost its AAA credit rating.
The good news is IDLV is up 4.3 percent year-to-date and has a 30-day SEC yield of 4.42 percent, according to PowerShares data.
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