Low-Vol ETFs Outshining Counterparts

April 25, 2013

Low-volatility ETFs seem to be delivering on their promise, and investors are responding with assets.


A lot has been said about low-volatility equities ETFs being all the rage lately, and a look at a fund like the iShares MSCI USA Minimum Volatility Index Fund (NYSEArca: USMV) seems to suggest that’s very much the case.

USMV, an ETF that essentially serves up exposure to low-volatility names found in the MSCI USA Index, has attracted $2.41 billion in net assets year-to-date, and now boasts more than $3.4 billion in total assets accumulated in just 18 months.

By comparison, its nonvolatility-focused counterpart, the iShares MSCI USA Index Fund (NYSEArca: EUSA) bled nearly $10 million since the beginning of the year, putting its total assets under management at a meager $156.2 million. USMV has also outperformed its counterpart significantly in recent months.

Russell Indexes itself—the provider behind the benchmarks anchoring the newcomers SPDR Russell 100 Low Volatility ETF (NYSEArca: LGLV) and the SPDR Russell 2000 Low Volatility ETF (NYSEArca: SMLV)—put out a note today highlighting how low-volatility indexes have, indeed, been delivering on their promise of lower variability than their respective broader universe, as well as stronger relative returns.

Investors seem to be listening. Demand for low-volatility strategies is also seen in other funds such as the PowerShares S&P 500 Low Volatility Fund (NYSEArca: SPLV), which has attracted a net of $1.30 billion year-to-date, boosting its total assets to almost $5 billion, while the SPDR S&P 500 ETF (NYSEArca: SPY) has shed a net of $7 billion in the same time frame.

The launch of the low-volatility SPDRs built around the Russell 1000 and 2000 indexes in February—and their respective growth to about $6.5 million in assets each—also speaks to that trend.

Russell had an unsuccessful foray as a fund sponsor into this pocket of the market before, shuttering its funds last October, but seems to be carving a new footprint as the index provider for the two State Street funds LGLV and SMLV.

“Concern about market volatility in recent years has spurred interest in indexes that focus in stocks exhibiting lower historical variability of returns than their parent indexes,” Russell Investment Strategies David Koenig said in the note.

“In today’s environment of heightened uncertainty, investors have utilized low volatility strategies in portfolio construction as a way to help manage portfolio volatility while maintaining equity market participation,” he said.


The Performance Difference

Since Jan. 1, 2013, iShares’ USMV has rallied 15.4 percent, extending what are now gains of more than 18 percent in the past year. That compares with 10.8 percent year-to-date gains for EUSA.

PowerShares’ SPLV, the pioneer in the space and currently the biggest low-volatility equities fund on the market, has also seen gains of more than 15 percent since Jan. 1, compared with SPY’s 11.5 percent rise in the same period. In the past 12 months, that performance stands at a 20 percent gain for SPLV versus a 14 percent gain for SPY.

More importantly, however, is how these funds measure up in terms of volatility.

While iShares doesn’t report standard deviation for a fund that’s less than three years of age, SPLV has reported 8.9 percent volatility in the past year, compared with 12.8 percent for the S&P 500 Index.

What’s more, SPLV’s Sharpe ratio has been roughly twice that of the S&P 500 in the past year. The Sharpe ratio measures risk-adjusted returns, meaning it sheds light on whether a fund’s higher returns relative to its peers are the result of too much additional risk exposure—the higher the ratio, the better the fund’s risk-adjusted performance is.

The Russell indexes benchmarking the latest-to-market SPDRs also reflect these performance differences.

The Russell 1000 Low Volatility Index and the Russell 2000 Low Volatility Index have seen year-to-date returns of 14.5 and 9.5 percent, respectively. It’s worth noting that the index returns are not entirely comparable to the fund returns listed above for USMV and SPLV, because fund returns include tracking error and fees.

That said, Russell said the index returns exceed those of their respective parent indexes by roughly 4 percentage points and 2 percentage points, respectively.

Russell has also said that its low-volatility 1000 and 2000 indexes have delivered a standard deviation year-to-date that’s 1 to 2 percentage points lower than the 11.6 and 15.2 percent standard deviation the Russell 1000 Index and Russell 2000 Index have seen since the beginning of the year.

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