Both the PowerShares S&P 500 Low Volatility (SPLV | A-60) and the iShares MSCI USA Minimum Volatility (USMV | A-79) are hugely popular with investors looking to manage volatility in their equity allocation.
So far in 2016, there’s been a lot of concern about increased volatility in equity markets centered on fears of a global recession.
But in recent weeks, it’s USMV that’s really attracting investor attention. In the past week alone between Feb. 22 and March 2, inflows into USMV have exceeded $900 million. During that time, SPLV has actually bled some $244 million in net redemptions, according to FactSet data. USMV was one of February’s most popular funds.
Year-to-date, the disparity in flows between these two funds now sits at $2.4 billion in fresh net assets for USMV, while SPLV has attracted less than $300 million. In other words, for every dollar SPLV takes in, USMV takes eight. Today USMV is a $9.75 billion fund, trading on average $168 million a day. SPLV has $6.01 billion in AUM, and some $137 million trades hands on a daily basis.
To some extent, part of USMV’s recent appeal is its performance—it is delivering outsized gains relative to SPLV, as the chart below shows:
Chart courtesy of StockCharts.com
But there are other key distinctions between these two funds.
SPLV tracks a volatility-weighted index of the 100 least volatile stocks in the S&P 500. It is basically a large-cap equity fund that offers a straightforward low-volatility take on the S&P 500.
USMV, meanwhile, picks its low-volatility holdings from a U.S. total-market universe. Being more broadly diversified across market capitalization makes USMV more attractive than SPLV as a core holding, S&P Capital IQ’s Todd Rosenbluth says.
“USMV can serve more as a core holding than SPLV because of its diversification,” he noted. “It also has a lower expense ratio.”
USMV Is Cheaper
USMV charges 0.15% in expense ratio. The highly liquid fund trades with an average spread of 0.03%, putting its total cost of ownership at about $18 per $10,000 invested a year.
SPLV comes with a 0.25% price tag. And once you factor in an average trading spread of 0.03%, the cost to owning SPLV goes to 0.28% a year, or $28 per $10,000 invested. That’s 55% more expensive to own SPLV than USMV.
That difference impacts total returns—the more you pay, the less you make.
Sector Tilts Vary
USMV typically overweights defensive, dividend-paying sectors relative to the broad market. Still, the fund currently holds financials as its biggest sector bet, at 20% of the portfolio.
What’s more, consumer staples and health care follow, at 19% and 15%, respectively, but technology rounds out the top, at 15% of the mix.
The makeup of SPLV at the top isn’t all that different: Consumer staples lead at 23%, followed by financials at 21%. But the fund’s industrials and utilities holdings play a much bigger role in the portfolio here than they do at USMV. Technology, meanwhile, is a tiny allocation, at about 3% of the mix.
“USMV is more sector diversified and neutral relative to SPLV, which has regular sector bets,” Rosenbluth said. “As such, the returns and the beta of the ETFs are different.”
SPLV also rebalances quarterly, while USMV rebalances semiannually, which requires more investor attention, he adds. “Regularly watching the holdings is needed since what is low risk today may not be the same later in the year,” said Rosenbluth.
In the end, both these ETFs are great funds that do their job well. But they do it differently.
Contact Cinthia Murphy at [email protected].