SPLV holds the 100 least-volatile stocks in the S&P 500 with no mechanism to adjust sector biases or tilts. As a result, the low-vol fund dedicates nearly one-third of its portfolio to the utilities space. We did a quick rundown of sector contributions to SPLV’s price drop in the past month and here’s what we found:
The utilities sector was by far the most dominant factor in the group—but there’s an even bigger story here.
Utility stocks have taken a beating in the past few months as investors moved out of dividend-paying equities in favor of Treasurys, which are starting to see higher yields. As Jonathan Cheng at the Wall Street Journal pointed out, the recent market has been heavily driven by defensive stocks, and it looks like investors are finally turning to cyclical stocks.
However, utilities exposure isn’t unique to SPLV.
As you can see above, it’s a feature that has affected the SPDR S&P 500 ETF’s (NYSEArca: SPY) portfolio in the past month as well.
The key difference here between SPLV and SPY is SPY’s exposure to financial firms that SPLV has discarded in its search for low-volatility stocks. As a result, SPY benefited from the rally in its group of financials relative to the group of financials in SPLV.
The inherent bias toward defensive stocks in USMV and SPLV was the backbone behind the funds’ low-volatility strategies.
However, if yields continue to climb as we’ve seen in recent weeks, these biases might undo the outperformance that investors have benefited from in the past.