A $700 Million Low-Volatility ETF? Who Knew?

December 16, 2011

What's behind the asset-gathering bonanza of PowerShares' low volatility fund SPLV?

(Updated to reflect fee waivers on Russell ETFs.)


The Invesco PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) has gathered more than $700 million since its launch in May, more than almost any other fund launched this year, trouncing the competition in the relatively new low-volatility ETF space. So what's the secret to SPLV's success besides the fact that it was first to market?

First, SPLV's returns are positive since launch—it's up almost 2.5 percent in the past six months. In comparison, the SPDR S&P 500 ETF (NYSEArca: SPY) has fallen about 4.5 percent, and two competing funds in the low-volatility fund market from Russell aren't even in the black. SPLV has an annual expense ratio of 0.25 percent, 5 basis points above one of the Russell funds and 5 basis points below the other.

A year ago, low-volatility funds didn't exist. But now with the global economy facing huge uncertainties, exchange-traded fund sponsors—including the world's biggest ETF firm, iShares—are lining up to bring out products to help investors navigate financial markets that have been volatile since stocks collapsed in 2008. So far, SPLV, with $733.1 million in assets and counting, is a head and shoulders above the crowd.

"What we are looking to do with SPLV is to provide investors some degree of protection in falling markets," Taylor Ames, senior equity product strategist at Invesco PowerShares, said in a telephone interview. "We believe that over an entire market cycle that cushioning will help portfolios in the long run."

Ames also argued that SPLV deserves a permanent presence in investment portfolios.

However, investment advisors are divided on that score. Some call it "market timing light," while others suggest that the fund's indexing methodology makes sense only in unsettled times.

The Competition

Russell launched two low beta funds just after SPLV in late May 2011, but they haven't come close to matching SPLV's performance.

The Russell 1000 Low Volatility ETF (NYSEArca: LVOL) has $28.7 million under management and has declined 0.75 percent in the past six months, while the Russell 2000 Low Volatility ETF (NYSEArca: SLVY), with $4.6 million under management, is down almost 5 percent in the past six months.

Then there's iShares' jump into low-volatility funds. The firm launched four funds in October that canvas virtually the entire universe of equity investment. The new ETFs and their expense ratios are:

  • iShares MSCI USA Minimum Volatility Index Fund (NYSEArca: USMV), 0.15 percent
  • iShares MSCI EAFE Minimum Volatility Index Fund (NYSEArca: EFAV), 0.20 percent
  • iShares MSCI All Country World Minimum Volatility Index Fund (NYSEArca: ACWV), 0.35 percent
  • iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSEArca: EEMV), 0.25 percent


Of the four, EEMV has gathered the most assets—almost $20 million as of Dec. 14, according to data compiled by IndexUniverse. That's probably a reflection of the popularity of emerging markets investments in general, and perhaps the greater degree of volatility of developing-world stocks.

The expense ratios on the iShares funds are also alluring, though shopping on price doesn't make much sense if performance isn't up to snuff. As far as that goes, it's still too early to say much about these funds' returns.

SPLV Under The Hood

SPLV was the first fund of its kind, and could be enjoying the first-to-market advantage everyone says is so important in the ETF industry. Still, Russell's LVOL and SLVY came to market just a few weeks later, which doesn't seem like much.

So far, their competitive price tags—LVOL and SLVY cost 0.20 percent and 0.30 percent, respectively, after 30 basis point fee waivers—don't seem to have caught investors' attention. Again, SPLV comes with a 0.25 percent for SPLV annual expense ratio.

Whatever the reasons for SPLV's success, officials at PowerShares and at S&P, the index provider, say the simplicity of the fund's indexing methodology may be helping.

SPLV employs a standard deviation strategy, which measures volatility of all 500 stocks in the S&P 500 Index and then whittles the listed companies down to the 100 with the least volatility. The 100 survivors are then weighted in a way that reflects their level of volatility. This screening takes place quarterly.

"Our methodology is really quite simple," said Craig Lazzara, senior director of the S&P 500 U.S. Equity Indices, which developed the low-volatility index for SPLV. "We tried the more complicated way, but this works better."

The Russell funds, by comparison, use a "risk factor model" developed in conjunction with Axioma Risk Analytics that "is probably more sophisticated" said Rolf Agather, director of index research and innovation at Russell Indexes.

"Because we also use an optimizer, we can also tell it to dampen down some of the other factors that might creep into a stock's return," such as beta, size, and momentum, Agather said.


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