Another Point Of View On The Low Vol Trade
Here is an interesting statistic courtesy of AltaVista Research: Combined assets under management for low and minimum volatility exchange-traded funds reside around $44 billion today, up from $1 billion at the end of 2011.
That is good for annual growth rate of 132 percent, a statistic sure to embolden those calling the low volatility ETF trade too crowded. And there are plenty of folks saying this, as it is arguably the most frequent criticism associated with ETFs such as the iShares Edge MSCI Min Vol USA ETF (iShares Trust (NYSE: USMV)) this year.
The Goldilocks Conundrum
The overcrowded criticism may be overshadowing more relevant concerns, such as the rising valuations investors are subjected to in order to minimize volatility and the style drift many low volatility stocks are experiencing into the momentum box.
As an aside, the argument that low volatility ETFs are getting crowded runs counter to an argument often proffered up by the ETF Illuminati, which is that investors should only buy the largest ETFs. Alas, that is a story for another day, but there are diverging opinions on whether or not the low vol ETF is too crowded.
“Though it is ironic that these funds have gained such popularity in an era when markets have been unusually tranquil, one question we often get is, 'Is the Min Vol trade too crowded?' We do find some shortcomings with these funds, but on the specific question of whether too much money has flowed into these stocks, setting them up for a reversal, the answer is probably not,” said AltaVista in a recent note.
USMV has added more than $6.1 billion in new assets this year, a total exceeded by just seven other ETFs. However, the asset classes represented by those seven ETFs are not subject to overcrowded chatter. The reality is, using simple math, it is hard to say the low volatility ETF is trade is crowded.
Based on AltaVista's number of $44 billion in combined assets for such numbers and ETFGI's number of $2.25 trillion for all U.S. exchange traded products as of the end of June, it is clear that low volatility ETFs are a mere fraction of the U.S. ETF industry.
“As impressive as their growth has been, the assets dedicated to these strategies in only about 2.5 percent of all equity ETF assets. Further, while valuations of companies in the iShares MSCI USA Minimum Volatility ETF (USMV) have certainly gotten richer over the past five years, so too have market valuations overall. On a relative basis, USMV’s forward price-to-earnings multiple has traded within a fairly narrow range of 1.06x–1.19x the forward P/E for the S&P 500,” added AltaVista.
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