Among the various investment factors, none are as hot this year as the low-volatility factor. Just look at the iShares Edge MSCI Min Vol USA ETF (NYSEARCA:USMV).
The iShares Edge MSCI Min Vol USA ETF is now the largest low-volatility ETF on the market after having pulled in $6.56 billion in new assets this year. Only three other ETFs have added more new assets than USMV on a year-to-date basis.
The PowerShares S&P 500 Low Volatility Portfolio (NYSEArca:SPLV), USMV’s chief rival among U.S. large-cap low-volatility ETFs, is not sitting idly by. SPLV has seen 2016 inflows of $1.44 billion, good for second among all PowerShares ETFs, according to issuer data.
USMV and SPLV are the kings among low volatility ETFs. That much is clear. Still, it is worth remembering that among investment factors, low volatility is one of the most studied and widely followed. With that in mind, ETF issuers have met investors’ desire for low volatility products that go beyond the confines of U.S. large caps and U.S. borders.
Here are some low-volatility ETFs to consider for investors looking to complement U.S large-cap strategies with different market capitalization spectrums or with international equities.
PowerShares S&P SmallCap Low Volatility Portfolio (NYSEARCA:XSLV)
Expense Ratio: 0.25% per year, or $25 on a $10,000 investment.
Smaller stocks are often thought of as a volatile asset class, but the PowerShares S&P SmallCap Low Volatility Portfolio (NYSEARCA:XSLV) can be a “have your cake and eat it too” proposition for investors looking for small-cap exposure.
XSLV’s lineup is comprised of the 120 member of the S&P SmallCap 600 Index with the lowest trailing 12-month volatility. To be precise, XSLV is currently home to 116 stocks, with an average market cap north of $1.6 billion, indicating this low-volatility ETF is home to stocks that reside on the larger end of the small-cap universe.
Conventional wisdom holds that one of the primary advantages of the low volatility factor is that it exposes investors to less downside when equity markets tumble. The rub there is that when stocks rise, these strategies do not capture maximum upside.
Try telling that XSLV. Year-to-date, the Russell 2000 and S&P SmallCap 600 indexes are up an average of 10.6 percent. XSLV is higher by 14.5 percent.
Those two widely followed small-cap benchmarks are sporting annualized volatility, on average, of 19.3 percent, according to ETF Replay data. XSLV’s volatility year-to-date is 15 percent, meaning this low-volatility ETF is sporting superior risk-adjusted returns.
Financial services stocks are over 54% of XSLV’s weight. The ETF’s top 10 holdings include ProAssurance Corporation (NYSE:PRA) and Getty Realty Corp. (NYSE:GTY).
iShares Edge MSCI Min Vol Emerging Markets ETF (NYSEARCA:EEMV)
Expense Ratio: 0.25%
The iShares Edge MSCI Min Vol Emerging Markets ETF (NYSEARCA:EEMV) is the emerging markets counterpart to the aforementioned USMV. EEMV follows the MSCI Emerging Markets Minimum Volatility Index, the low volatility answer to the widely followed MSCI Emerging Markets Index.
As was noted with XSLV, low-volatility ETFs often perform less poorly than their traditional counterparts when equity markets slide. EEMV was certainly less bad than standard emerging-markets funds when the asset class struggled over the past several years.
However, emerging markets equities are rebounding this year and much of that resurgence is being driven by higher-beta markets such as Brazil and Russia. As a result, EEMV is up “just” 12.9% year-to-date, or 410 basis points less than the MSCI Emerging Markets Index.
As a low-volatility emerging-markets ETF, it is not surprising that EEMV devotes over 28% of its combined weight to Taiwanese and South Korean stocks, as those are two of the least-volatile developing markets.
Likewise, it is not surprising that EEMV is underweight Latin America relative to the MSCI Emerging Markets Index. EEMV also excludes Russian stocks and devotes just 1.8% of its weight to Brazil.
Legg Mason Low Volatility High Dividend ETF (NYSEArca:LVHD)
Expense Ratio: 0.3%
The Legg Mason Low Volatility High Dividend ETF (NYSEArca:LVHD) is the youngest of the ETFs highlighted here at just eight months old. However, LVHD is off to a solid start, having amassed around $80 million in assets since coming to market in December.
This low-volatility ETF is “focused on income, risk mitigation and capital appreciation. It is based upon the idea that a stock’s ability to sustain a strong dividend payout is often associated with lower volatility, making these two characteristics complementary. Using a disciplined, rules-based methodology, the fund will screen for stocks with the potential for sustainable high dividends, while simultaneously screening out historically volatile stocks in the market,” according to Legg Mason.
Low-volatility, high-dividend ETFs tend to feature small lineups with heavy allocations to a small number of sectors. That is the case with LVHD, as it holds just 95 stocks, a combined 43 percent of which hail from the utilities and consumer staples sectors. Another combined 32 percent of the ETF’s weight is financial services and industrial names.
LVHD’s top 10 holdings includes International Business Machines Corp. (NYSE:IBM) and AT&T Inc. (NYSE:T).
Clearly, LVHD is off to a good start for a rookie ETF and this is not a commentary on this low volatility fund, but as has been previously highlighted here, there is intense competition in the low volatility high dividend ETF space.
As of this writing, Todd Shriber owned shares of General Mills.
