Market Overview

This Low Volatility ETF Is On Fire

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This Low Volatility ETF Is On Fire

This year's exchange-traded funds' inflows are marked by at least one obvious theme: flight to safe-haven assets. That explains the top asset-gathering ETF year-to-date is the SPDR Gold Trust (ETF) (NYSE: GLD) and why six of the top 10 asset-gathering ETFs are fixed income funds.

Among equity-based ETFs, low volatility funds have been prolific gatherers of new assets and that includes the iShares MSCI USA Minimum Volatility ETF (iShares Trust (NYSE: USMV)). Only GLD has added more new assets this year than the $2.63 billion hauled in by USMV.

Minimum Volatility ETF

A money manager cited in a Bloomberg article on USMV said investors' doubts in the recent rally in equities has them favoring lower volatility fare, such as utilities, consumer staples, telecoms, real estate investment trusts.

Related Link: A New Multi-Asset ETF Of ETFs

However, telecom and utilities stocks, favored hangouts for dividend investors looking to skirt volatility, combine for less than 13 percent of USMV's weight. The ETF does devote over 15 percent of its weight to consumer staples stocks, such as Procter & Gamble Co (NYSE: PG) and General Mills, Inc. (NYSE: GIS). Additionally, a fair amount of USMV's nearly 21 percent weight to financial services stocks, the ETF's largest sector weight, is allocated to REITs.

The $10.2 billion USMV follows the MSCI USA Minimum Volatility (USD) Index.

“The MSCI USA Minimum Volatility (USD) Index aims to reflect the performance characteristics of a minimum variance strategy applied to the large and mid cap USA equity universe. The index is calculated by optimizing the MSCI USA Index, its parent index, in USD for the lowest absolute risk (within a given set of constraints). Historically, the index has shown lower beta and volatility characteristics relative to the MSCI USA Index,” according to MSCI.

Low volatility stocks outperform their high beta counterparts during times of divergent global monetary policies. That is exactly what investors are dealing with as the Federal Reserve wants to raise rates, while the Bank of Japan, European Central Bank and others engage in easy monetary policies.

Critics of low volatility ETFs say that long-term investors must endure sub-par returns relative to the traditionally weighted benchmark in exchange for the reduction in volatility. USMV scoffs at that notion as it has outperformed the S&P 500 by nearly 700 basis points over the past three years.

Disclosure: Todd Shriber owns shares of General Mills.

Image Credit: Public Domain

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