Recent underperformance of low-volatility funds is tied to their bias toward defensive stocks and lack of financials.
Low-volatility strategies such as the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) have been incredibly popular with investors this year. But these funds have started to show underperformance that might sully their appeal.
SPLV is by far an investor favorite. With more than $4.9 billion in assets and average daily trading volume north of $80 million, there’s little question that the fund is well liked by investors. However, something interesting has occurred.
As part of our “Fit” section in the ETF Analytics system, we run a regression analysis of each ETF against a designated segment benchmark. In the case of SPLV, its segment benchmark is the MSCI USA Large Cap Index.
Interestingly, for the past year, SPLV has maintained a statistically significant 12-month alpha in the range of 6 percent against the MSCI USA Large Cap Index.
Although SPLV is a passively managed fund tracking its own underlying index, when measured against a plain-vanilla large-cap index, the fund’s strategy and sector tilts can lead to significant outperformance for a period.
This week, however, the SPLV finally lost its alpha—and it makes sense given the fund’s latest fallback in the last month relative to the MSCI USA Large Cap Index.