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):

 

 

For another way to look at the differences between these sector allocations—how they stack up against each other and the broader equity segment these portfolios navigate—consider the chart below:

 

5_Sector_comparison

(For a larger view, click on the image above)

 

Source: Style Analytics

 

2. Value

If you have a value bias in U.S. large-cap equities, USMV is probably a better fit for you than SPLV.

According to Style Analytics data, USMV tilts more toward value exposures, measured by aspects such as cash flow yield. The fund also tilts more heavily toward dividend yield than SPLV does, as well as the S&P 500.

3. Growth

SPLV tilts more toward growth than USMV, keeping its allocation closer to market neutral, measured here as the S&P 500 index (the “zero” line in the chart below).

 

6_Factor_Analysis

(For a larger view, click on the image above)

 

Source: Style Analytics

 

Making An Informed Choice

At the end of the day, USMV and SPLV deliver lower volatility relative to the S&P 500 (which serves as the baseline in the charts above—the “zero”) as well as lower volatility than the broader segment of U.S. large cap stocks. They do what they set out to do.

But an ETF doesn’t stand in a vacuum. Every portfolio tilt, every factor bet, every holding difference impacts your overall mix in a portfolio and, ultimately, your returns.  

USMV may be one of the most popular ETFs of the year, and it may be the low-vol ETF for you, but it’s certainly not a one-size-fits-all strategy for investors concerned with volatility. A look under the hood is key to inform you on all sorts of things before you opt in.

Contact Cinthia Murphy at [email protected]

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