Low volatility exchange-traded funds (ETFs) could be becoming an afterthought for many investors, as volatility continually probes new lows. Data suggests investors have been pulling money from popular U.S.-focused low volatility ETFs, as the CBOE Volatility Index, also known as the VIX, has recently been touching record lows.
While investors have recently been yanking money from low vol ETFs, such as the iShares Edge MSCI Min Vol USA ETF (NYSEARCA:USMV) and the PowerShares S&P 500 Low Volatility Portfolio (NYSEARCA:SPLV), these and other low-volatility ETFs have been surging. In fact, SPLV and USMV are keeping pace with the S&P 500 year-to-date and both of the low volatility ETFs have recently hit all-time highs.
The recent ascent of low volatility ETFs is perhaps surprising because, well, volatility is low and low volatility strategies are designed to perform less poorly on the downside, not necessarily deliver out-performance as stocks soar.
USMV and SPLV are the kings of low volatility funds dedicated to U.S. stocks, but investors have some other compelling options when it comes ETFs that offer volatility reduction strategies. Consider some of the following low volatility ETFs.
Low-Volatility ETFs: iShares Edge MSCI Min Vol Europe ETF (EUMV)
Expense Ratio: 0.25% per year, or $25 annually for every $10,000 invested
Investors actively following the world of ETFs this year have likely heard about the big inflows to ex-U.S. equity funds. The primary reason why so many investors have been flocking to internationally developed markets is that many of these markets are attractively valued relative to U.S. equities.
For investors looking to tiptoe back into European stocks, the iShares Edge MSCI Min Vol Europe ETF (NYSEARCA:EUMV) is a fine idea and simply because this is a low-volatility ETF does not mean investors will be left wanting more. EUMV, which tracks the MSCI Europe Minimum Volatility Index, is higher by more than 18% year-to-date.
Seasoned low vol investors are unlikely to be surprised by EUMV’s geographic and sector allocations. For example, this low-volatility ETF devotes over 45% of is weight to the U.K. and Switzerland, while consumer staples and healthcare stocks combine for over a third of EUMV’s sector weight.
EUMV turns three years old this week and it has $61.8 million in assets under management. That does not sound like much compared to other low vol ETFs, but nearly a third of EUMV’s assets have flowed into the fund this year.
Low-Volatility ETFs: Legg Mason Low Volatility High Dividend ETF (LVHD)
Expense Ratio: 0.30%
The Legg Mason Low Volatility High Dividend ETF (NASDAQ:LVHD) is not the first ETF to marry the low volatility and high dividend concepts, but since coming to market in late 2015, this low-volatility ETF has attracted a following as highlighted by its more than $150 million in assets under management.
LVHD follows the QS Low Volatility High Dividend Index. That benchmark uses familiar sector weights for a low volatility/high dividend strategy as utilities and consumer staples stocks combine for over 38% of the fund’s roster.
That does not mean LVHD lacks for some excitement. This low vol fund devotes 22% of its weight to consumer discretionary and technology stocks, representing fairly high weights to those groups for a low vol fund.
Nearly two-thirds of the holdings in this low-volatility ETF have markets ranging from $25 billion to $50 billion or above $50 billion. LVHD’s top 10 holdings include Dow Jones Industrial Average components McDonald’s Corporation (NYSE:MCD), The Coca-Cola Co (NYSE:KO) and Boeing Co (NYSE:BA).
Low-Volatility ETFs: PowerShares S&P SmallCap Low Volatility Portfolio (XSLV)
Expense Ratio: 0.25%
Small-cap stocks and ETFs have been vexing investors this year, delivering sub-par returns, while large-caps continue surging. Investors that want to stay involved with smaller stocks while trimming volatility can consider PowerShares S&P SmallCap Low Volatility Portfolio (NYSEARCA:XSLV).
XSLV applies a similar methodology to small-caps that its stablemate, the PowerShares S&P 500 Low Volatility Portfolio applies to larger stocks. The small-cap, low-volatility ETF holds the 120 members of the S&P SmallCap 600 Index with the lowest trailing 12-month volatility.
Over the last year, XSLX and the S&P SmallCap 600 have both returned 21.7%, but the small-cap low vol fund has been 260 basis points less volatile than the broader small-cap benchmark, indicating XSLV is doing its job.
Due to the fact that many of the consumer staples and utilities names that meet the requirements set forth by low-volatility ETFs are large caps, XSLV’s combined weight to those sectors is jut over 9%. Financial services and industrial stocks combine for 45.3% of this ETF’s roster.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.