More Low-Vol Large-Cap ETFs?

March 08, 2013

In the midst of the steadily rising equity markets, ETF issuers are still pumping out low-volatility funds.

In late February, State Street launched the SPDR Russell 1000 Low Volatility ETF (NYSEArca: LGLV)—a new challenger in the low-volatility U.S. large-cap space.

The U.S. equity Russell indexes have long been used by investors who wanted a better understanding of market performance beyond the Dow Jones industrial average or the S&P 500 Index. So it makes sense that someone would eventually launch some ETFs based on the low-volatility versions of these indexes.

However, State Street wasn’t the first to come up with this idea. In fact, in May 2011, Russell itself came out with its own ETF tracking the same index: the Russell 1000 Low Volatility ETF (NYSEArca: LVOL). Unfortunately, lack of investor interest and low assets led to LVOL’s fund closure in October 2012.

Russell claims that the indexes “use techniques to more precisely track the least volatile stocks.” However, it’s retreated back to the index management side of things and it’s now left to see whether State Street can succeed where Russell could not.

The real question is whether LGLV is offering anything new to the space that investors don’t already have.

LGLV competes directly with the most well-known ETF in the minimum volatility space: the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV). With over $3 billion in assets, there’s no denying SPLV is a go-to fund for investors.

The problem is that SPLV suffers from hugely unaddressed sector biases—it’s essentially a utilities sector ETF, with nearly a third of the fund invested in the sector, which makes up less than 4 percent of the S&P 500.

LGLV’s portfolio is slightly better when it comes to diversification, but it still has a strong allocation to the likes of consumer staples, health care and financials.

Sector tilts

The Russell 1000 digs much deeper into the midcap space than the S&P 500, opening up the universe from which LGLV selects its holdings. Still, LGLV maintains an identical exposure to large-cap stocks as SPLV. On a weighted average basis, however, LGLV is heavily biased toward larger companies.

Size Tilts

Past performance is no guarantee of what the future holds, but it’s still an informative metric. It’s tough to make a call now on LGLV, considering the fund has little to no history behind it, but we do have its underlying index history.



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