More To Low Vol ETFs Than Volatility

March 08, 2019

The iShares Edge MSCI Min Vol U.S.A. ETF (USMV) has attracted $2.6 billion in net creations so far this year, making it one of the top 10 most in-demand ETFs of 2019.

In a year when so many investors are concerned about volatility in the U.S. stock market, this is hardly surprising. USMV is a great mousetrap in this segment, boasting $23.5 billion in total assets; trading almost $250 million on average every day at an average spread of only 0.02%; and costing 0.15% in expense ratio, or $15 per $10,000 invested.

Additional Factor Bets

USMV, however, makes other factor bets relative to the universe of U.S. large-cap-blend equities and to its main competitor, the Invesco S&P 500 Low Volatility ETF (SPLV)—SPLV has seen about $842 million in net inflows year-to-date.

These factor bets matter because different portfolio tilts appeal to different investor biases, and ultimately lead to different return streams.

Year-to-date, the performance disparity between USMV and SPLV is about 1.5 percentage points, as the chart below shows. (Both fund are underperforming the SPDR S&P 500 ETF Trust (SPY) this year.)

 

Chart courtesy of StockCharts.com

 

3 Key Differences

On the surface, there are key easy-to-spot differences between these two portfolios. First, USMV, which is 2.5 times the size of SPLV in total assets under management—$23.5 billion versus $9.7 billion—costs 40% less. USMV has an expense ratio of 0.15% versus SPLV’s 0.25% fee.

USMV is also bigger in terms of portfolio size, comprising 215 stocks compared with SPLV’s 100 holdings, so it’s a broader portfolio. 

But there are three other key differences in the way these two ETFs go about serving up access to a lower-vol ride.

1. Sector Allocation

USMV has sector constraints, linked to the fund’s methodology where correlation between stocks is considered to deliver a minimum-volatility portfolio. SPLV, on the other hand, looks for the lowest-vol stocks in its universe. It’s an unconstrained strategy that can make significant sector bets at any rebalance—one that currently bets heavily on utilities and real estate.

At a glance, here’s how the two portfolios’ sector slices stack up (and their respective differences in top holdings):

 

 

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