A frequent criticism of low volatility exchange-traded funds is that these funds leave some upside on the table during bull markets. That critique misses the mark because the objective of low volatility strategies is not to capture all of the upside in a bull market, but rather to perform less poorly relative to traditional funds when markets swoon.
Although the sample size for 2018 is small, the iShares Edge MSCI Min Vol USA ETF (CBOE:USMV) and the PowerShares S&P 500 Low Volatility Portfolio (NYSE: SPLV) have some work to do to regain investors’ confidence.
Entering Monday, the S&P 500 sported a 2 percent year-to-date loss while USMV and SPLV were down an average of 3.2 percent. To be fair, SPLV and USMV have been significantly less volatile than the cap-weighted S&P 500 to start 2018.
Still Reasons To Believe
While the low volatility factor is clearly struggling in the early part of 2018, some analysts believe strategies such as SPLV and USMV could prove rewarding as this year moves forward.
“Even though the worst might not be over, CFRA is not projecting the start of a new bear market, since we don’t forecast a recession,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a Monday note. “In 2018, CFRA sees real GDP rising 3.1 percent and S&P 500 EPS up more than 19 percent. As such, investors could benefit from staying with large cap strategies that have historically been less volatile.”
SPLV has recently been hampered by its almost 20 percent weight to the utilities sector, which has been one of the worst-performing groups since late last year. USMV’s utilities weight is just 7.3 percent compared to 19.7 percent in SPLV.
“In 2017, when risk was being rewarded in the equity market, SPLV’s 17 percent return was, not surprisingly, below the 22 percent for SPDR S&P 500,” said Rosenbluth. “However, the three-year annualized standard deviation for SPLV of 9.27 was 9 percent lower than SPY, while its beta was just 0.64 (SPY has a beta of 1).”
USMV allocates almost 37 percent of its combined weight to technology and healthcare stocks while financial services and consumer staples stocks combine for almost 24 percent.
“USMV rose 19 percent in 2017, ahead of SPLV, but still behind SPY,” said Rosenbluth. “The iShares ETF also has a lower annualized three-year standard deviation of 8.53, but a beta of 0.67, highlighting the importance of understanding the distinctions of these two similar sounding ETFs and the broader market.”
CFRA has Overweight ratings on SPLV and USMV.
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