The flip side is that SPLV has only 4.7% of the mix in technology stocks, which represents 26.5% of the S&P 500.
“The biggest knock on SPLV is that its simple portfolio construction creates significant sector over- and underweights,” Kashner said.
Sources: FactSet, ETF.com
These sector tilts impact overall performance. Consider that, year to date, technology stocks in the S&P 500 are up 25%, and health care is up only 5%. But in the past month, as the S&P 500 struggled to break even, utilities and health care each rallied about 2.5%. SPLV offered better downside protection in recent weeks as the market tumbled than did USMV.
Should that matter? Outperformance is great, but it’s really not what low vol investing is all about.
“If the goal is to be in the least risky stocks, then you want to be there no matter what, and you shouldn’t have a focus on performance,” said CFRA’s Todd Rosenbluth.
What’s interesting is that, despite these differences in methodology, there’s a lot of overlap between these ETFs.
For starters, about 75% of SPLV’s holdings can also be found in USMV’s portfolio, according to FactSet data. Each of these funds’ top 10 holdings represent about 11-15% of the overall mix—even though USMV is a bigger portfolio, concentration in top holdings is slightly bigger than in SPLV’s. Ultimately performance lies in individual holding returns. (To see a list of their individual holdings, check out the USMV and SPLV fund pages.)
More importantly, both USMV and SPLV have a beta of around 0.7, meaning they are each delivering a ride that’s about 30% less volatile than the S&P 500 despite their portfolio differences. Historically, beta of these funds has been similar over time.
All About Price & Size
But there’s the issue of cost. USMV costs 40% less than SPLV.
With an expense ratio of 0.15%, or $15 per $10,000 invested, USMV delivers a broadly diversified minimum volatility portfolio that’s about 30% less volatile than the S&P 500. SPLV also delivers on its low vol goal, but it costs 0.25%.
That cost difference, coupled with USMV’s huge size and liquidity, could help explain why USMV is attracting the lion’s share of asset inflows.
USMV has $28.1 billion in total assets, and trades some $207 million on average a day, at spreads averaging 0.02%. By comparison, SPLV has $11.5 billion in assets—less than half USMV’s size—and sees $139 million in average daily volume.
So far this year, USMV has gathered about $5.25 billion in net creations versus SPLV’s net inflows of $1.75 billion. In other words, for every $1 SPLV gets, USMV gets $3.
“Size and liquidity are often an attention grabber for institutional investors,” Rosenbluth said. “The MSCI suite of indices is more widely used from a factor perspective, even though the low vol part of S&P/Dow is quite prominent.”
“If you’re building a factor rotation effort, as a lot of people do, size leads to investor attention,” he added. “It becomes a circular effort of assets begetting assets.”
Contact Cinthia Murphy at [email protected]