SPLV Vs DEF: Different Flavors Of Defense

September 04, 2014

For nervous investors bracing for a stock-market pullback, two funds offer real choices.

September usually brings out investor jitters, given its track record of being a month that’s been tough on equities. It seems appropriate, then, to look more closely into some of the portfolio protection that investors can get through various ETFs.

Many analysts and economists in September preach caution, warn of downturns and closely watch the market’s every move. This year, concerns may be heightened by the fact that the market is at record-high levels despite what many deem to be slow economic growth, and a large retail investor base that remains sidelined.

Moreover, the Federal Reserve is expected to bring to an end its massive bond-buying program before the year is over. So-called quantitative easing has fueled quite of lot of the exuberance in U.S. stocks in the past few years.

“Despite stocks’ strong recent performance, investors may want to exercise a bit of caution going into the fall,” BlackRock’s Chief Investment Strategist Russ Koesterich said in his most recent blog.

“September is historically the weakest month of the year,” he said. “Generally, I put little faith in seasonal biases, as most turn out to be just statistical noise. September, however, appears to be different.”

SPLV: The Low-Volatility Approach

Outside of trimming an allocation to equities for Treasury ETFs instead—something we’ve seen happen recently—strategies like the PowerShares S&P 500 Low Volatility Portfolio (SPLV | A-44) usually stand out for investors concerned about an uptick in volatility.

SPLV boasts more than $4.65 billion in total assets gathered in just over three years, making it one of the most popular low-volatility U.S. equity strategies in an ETF wrapper.

Its appeal is easy to understand: The portfolio offers lower risk exposure to the U.S. large-cap segment by investing in the 100 S&P 500 stocks that show the least volatility over the past year. The indexing screen is designed to limit losses when markets turn south.

The mix is rebalanced quarterly—its most recent rebalancing took place in August—resulting in a portfolio that allocates heavily to defensive sectors such as utilities. SPLV currently has a roughly 24 percent exposure to financials, 20 percent to utilities and 15 percent to consumer staples. Its largest holdings are well-established names like McDonalds, Walmart and Procter & Gamble.

So far this year, the fund has attracted almost $500 million in new assets, as it rallied 8.3 percent—delivering a relatively smoother ride, albeit slightly underperforming the S&P 500, as the chart below shows:

SPLV_SPY_YTD_Perf

SPLV could resonate even more in the month ahead if investors really begin to tune in to the ongoing geopolitical turmoil in Ukraine and the Middle East, the grim possibility of deflation in the eurozone and, not least, as they sharpen their focus on the Fed’s timeline for raising rates.

These factors, to quote Koesterich, should contribute to an uptick in volatility going forward. In fact, the VIX Volatility Index, also known as the fear gauge, is today about 15 percent higher than its previous three-month average, according to data compiled by BlackRock, pointing to an upward trend.

 

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