Volatility may be poised to rear its head with rising interest rates and disappointing economic data upsetting financial markets. The VIX—the Chicago Board of Exchange’s Volatility Index—is moving up after settling down in mid-August.
Charles Schwab Corp. has said investors can expect volatility to persist, and a recent Barron’s column by Stephen Miran sees increased volatility as the new normal due to shifts in the global economy.
How to ride this out? A wide range of low volatility exchange-traded funds may provide investors with answers, and smoother sailing. Some of them announce their low volatility in their names, such as the Invesco S&P SmallCap Low Volatility ETF (XSLV), while others meet the low vol definition by virtue of the sector or industry they cover.
Here we consider 10 U.S. equity funds with more than $50 million in assets under management that offer the highest exposures to the low volatility factor as determined by MSCI.
Six of the ETFs are issued by Invesco and track indexes provided by S&P Global. Invesco leaned into the smart beta trend years ago and launched a bevy of funds offering different low volatility angles on the U.S. market. There’s also a single actively managed ETF in the group. And two of the funds are equal-weighted sector ETFs.
|Ticker||Fund||Inception||AUM||Low Vol Factor||YTD Performance||YTD Flows|
|XSLV||Invesco S&P SmallCap Low Volatility ETF||2/15/2013||$706.66M||0.90||-14.17%||-$358.94M|
|SIXL||ETC 6 Meridian Low Beta Equity Strategy ETF||5/11/2020||$142.52M||0.89||-10.01%||$10.15M|
|RHS||Invesco S&P 500 Equal Weight Consumer Staples ETF||11/1/2006||$630.21M||0.89||-2.93%||$187.75M|
|SPLV||Invesco S&P 500 Low Volatility ETF||5/5/2011||$10.79B||0.86||-7.51%||$2,692.35M|
|RYU||Invesco S&P 500 Equal Weight Utilities ETF||11/1/2006||$470.44M||0.85||8.06%||$224.30M|
|LVHD||Legg Mason Low Volatility High Dividend ETF||12/29/2015||$738.92M||0.84||-5.64%||$12.24M|
|XRLV||Invesco S&P 500 ex-Rate Sensitive Low Volatility ETF||4/9/2015||$53.26M||0.84||-8.53%||$4.72M|
|BIZD||VanEck BDC Income ETF||2/12/2013||$542.10M||0.84||-5.71%||$67.95M|
|XMLV||Invesco S&P MidCap Low Volatility ETF||2/15/2013||$1.15B||0.82||-10.06%||-$77.66M|
|IYK||iShares U.S. Consumer Staples ETF||6/12/2000||$1.55B||0.82||-3.05%||$848.72M|
Source: ETF.com, data as of 9/16/2022
The Low Vol Label
Six of the funds in the group have low volatility or low beta incorporated into their names. The fund with the highest exposure to the low vol factor is the $707 million XSLV, with a factor exposure of 0.90. The fund is down 14.17% year to –date, while its plain vanilla counterpart, the SPDR S&P 600 Small Cap ETF (SLY), is down 17.54%.
It should be noted that SLY has an exposure to the low volatility factor of -0.09. However, it should also be noted that XSLV has seen the most outflows of any of the funds in the group, losing nearly $360 million year to date.
The ETC 6 Meridian Low Beta Equity Strategy ETF (SIXL) has the second highest exposure to the low vol factor, at 0.89, and is the only actively managed fund in the group. It focuses on companies offering the lowest beta (similar to volatility), while taking into account profitability, growth and ability to service debt. The fund is down 14.17% year to date, which is noticeably better than the 18.81% decline in the Vanguard Total Stock market ETF (VTI).
The largest ETF in the group is the $10.8 billion Invesco S&P 500 Low Volatility ETF (SPLV), which has a factor exposure of 0.86%. The fund is down just 7.51% year to date compared with the SPDR S&P 500 ETF Trust (SPY) decline of 17.88%. SPLV includes the 100 lowest volatility stocks from the S&P 500 Index. It has pulled in $2.7 billion so far this year, more than any other fund in the group
Three sector funds offer the best performance among the 10 ETFs in the group. Two of them represent consumer staples, which is not surprising given the sector represents companies providing things consumers generally can’t do without, meaning demand is stable. The $630 million Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS) ties with SIXL for the second highest factor exposure in the group, at 0.89. It also has a year-to-date return of -2.93%, making it the second best performer.
The $1.6 billion iShares US Consumer Staples ETF (IYK) has a factor exposure of 0.82 and a year-to-date return of -3.05%.
The fact that two of the funds in the top 10 for exposure to the low volatility factor are equally weighted suggests the weighting approach has a dampening effect on a fund’s volatility. The Invesco S&P 500 Equal Weight Utilities ETF (RYU) has a low vol factor exposure of 0.85. Meanwhile, its cap-weighted counterpart, the Utilities Select Sector SPDR Fund (XLU) has a factor exposure of 0.79.
Like consumer staples, utilities is a fairly inflation- and recession-proof sector, as the companies therein offer services that consumers typically can’t do without. RYU has the best year-to-date performance among the group and is the only one in positive territory for the period, gaining 8.06%.
With so many economic and geopolitical uncertainties looming, low-volatility funds may see renewed attention. Although offering a smoother ride for investors generally means a little less upside when markets are on an upswing, investors these days may be more concerned about mitigating big downturns.
The lowest volatility ETFs, however, may not be labeled as such. Investors may want to consider ways they can reduce volatility in their portfolio and be sure to look beyond the label.
Contact Heather Bell at [email protected]