Todd Rosenbluth is director of ETF and mutual fund research at CFRA.
Amid rising rates in 2017, investors have shifted assets away from certain defensive dividend and low-volatility strategies, favoring products that offered more cyclical exposure that can benefit as rates rise.
Yet thanks to continued product innovation, there are now some strong smart-beta strategies that combine some defensive and cyclical components.
Thus far in 2017, the iShares Edge MSCI Minimum Volatility USA ETF (USMV) and the PowerShares S&P 500 Low Volatility Portfolio (SPLV) have shed a combined $1.3 billion in assets. Despite the exposure differences—for example, USMV has sector constraints not employed for SPLV—both offer relatively strong exposure to higher-dividend-yielding stocks relative to the S&P 500 Index.
As the Fed raises rates further this year, a rotation away from these “bond proxies” may occur.
CFRA, an independent research provider covering more than 1,500 stocks and 1,200 ETFs, has “overweight” rankings on both ETFs, based on a combination of holdings-level analysis and fund attributes.
More specifically, SPLV and USMV currently earn favorably low-risk-consideration attributes in our research, which is consistent with the downside protection investors should seek from a lower-volatility product.
Interest Rate Performance Screen
In April 2015, the PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (XRLV) came to market and has $220 million in assets. Similar to the $6.5 billion SPLV, XRLV focuses on the 100 least volatile stocks in the S&P 500 Index. But XLRV first excludes stocks that historically have performed poorly in rising interest rate environments. Examples of stocks inside SPLV that do not make the cut for XRLV include utilities Dominion Resources and Southern Co.
Rather, those and other utilities are replaced in XRLV by other S&P 500 constituents, including industrials stocks Ametek and J.B. Hunt Transport Services. Both are CFRA buy recommendations that have medium CFRA qualitative risk considerations.
In addition to industrials (25% of assets), information technology stocks (16%) are well represented in XRLV. Apple and Cisco Systems are two such holdings. XRLV also earns low CFRA risk consideration ranking inputs, but a neutral STARS input reflecting our qualitative view of the constituents’ valuation.
What’s Inside Low-Volatility ETFs Can Differ
Sources: iShares, PowerShares, March 17, 2017
In 2017, XRLV was up 5.9% as of March 17, ahead of SPLV’s 5.1%, highlighting the importance of understanding the construction of these index-based products.