Echoes Of SPLV’s Midas Touch?

January 17, 2012

Last week, PowerShares launched two new international ‘low volatility’ ETFs. But will they replicate the success of SPLV?

You can’t blame the issuer for trying. After all, the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) it launched in May of last year now has more than $1 billion in assets.

The new funds—the PowerShares S&P Developed Markets Low Volatility Portfolio (NYSEArca: IDLV) and the PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEArca: EELV)—apply the same index construction rules to the international markets.

S&P ranks securities based on the standard deviation of their price returns over the past year. Based on this measure, it chooses the least volatile stocks in a given index, and then weights them based on their relative volatility such that the least volatile stocks get the highest weights. S&P rebalances these indexes quarterly.

SPLV, the first of these low-volatility funds to launch, tracks the S&P 500 Low Volatility Index, which consists of the 100 least volatile S&P 500 securities.

IDLV tracks the S&P BMI International Developed Low Volatility Index, which pulls the 200 least volatile stocks from the S&P Developed Ex-U.S. and South Korea LargeMidCap BMI Index. As the index name suggests, IDLV excludes U.S. and South Korean securities from its selection pool.

Finally, EELV tracks the S&P BMI Emerging Markets Low Volatility Index, which pulls the 200 least-volatile stocks from the S&P Emerging BMI Plus Large Mid Cap Index.

For investors who want diversified low-volatility exposure, the three indexes shouldn’t overlap at all.

SPLV, IDLV and EELV offer interesting alternatives to simply investing in a defensive sector like consumer staples or utilities. Each ETF is relatively diverse from a sector-exposure standpoint:

Low-Volatility ETF Sector Breakdown

That sector diversification may or may not be a good thing. Over the past six months, the Vanguard Utilities ETF (NYSEArca: VPU) proved a more defensive fund than SPLV, outperforming it by almost 0.70 percent. In contrast, SPLV beat the Vanguard Consumer Staples ETF (NYSEArca: VDC) and blew the S&P 500 out of the water (graphed below as SPY).

Low Volatility ETF Performance

Some of the performance differential is likely due to different dividend yields. SPLV’s constituents yield 3.37 percent, while VPU’s yield 3.97 percent—a difference of 60 basis points. Still, the performance period above only covers seven months and dividend yields are annualized, so yields don’t tell the whole story.


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